There are good reasons to ask if gold has bottomed, as it has apparently formed a base with an upward bias over the last six months. Not only has it seemingly formed a base, but the reasons given for gold's sharp April 2013 decline have just evaporated and are seen now to have been imaginary.
Before talking about price action of gold, I would like to cite a recent news article to put the above sentence in some context.
Cyprus central bank has no plan to sell gold reserves
This article was by some quirk was just released on Friday the 13th - I suppose to show what a joke this was on gold investors (that Cyprus was ever going to sell its gold).
The way I view the release of this information, Reuters could have prefaced the above title with the four words,
"Hey chumps, guess what ... ?" so the new release title would read,
"Hey chumps, guess what: Cyprus central bank has no plan to sell gold reserves (and never did)"
Does it all make sense now? Cyprus was going to sell its gold - this was the triggering event of the sharp gold sell-off, or was given as the reason. And now, at a possible bottom, it is revealed that Cyprus is not selling its gold. At the beginning of the gold sell-off this was the narrative and the rationalization for the sell-off; this was the story that was sold to investors: "Cyprus is selling its gold" and that others [PIGS] will follow too in selling their gold.
Gold futures fell to the lowest since January 2011 on April 16 on increased investor concern that European governments may have to follow Cyprus in selling reserves, Goldman Sachs Group Inc. said in a report yesterday
Cyprus Finance Minister Sees Gold Sale Within Next Months. April 17, 2013
So much for the rationale for the sell-off. Not that Cyprus' gold was a huge amount to begin with, but it was the loudest part of the "Everyone is selling gold" media chorus.
Now - it is not happening.
Was this just a lie to begin with?
As the media is now admitting that Cyprus is not selling its gold, is this the media clue that the bottom is in?
Alright, now let's look at price.
What is one of the most important factors to consider when looking at a potential bottom in an investment, be it a stock, bond or commodity? Who would disagree that "price action" is the first thing to look at and analyze?
This article will look at the price action of gold by looking at the SPDR Gold Shares Trust, (NYSEARCA:GLD) as a proxy for gold as gold future charts do not show multi-year continuity as a GLD chart would, and are not as accessible to the non-future trading investor. This does not mean that I am recommending purchasing GLD over physical gold or gold coins or other gold investments such as (CEF) or (PHYS) or the mining ETF (GDX). Actually I prefer investment vehicles that hold the actual gold, rather than a leveraged gold receipt.
Several "Fundamental" considerations will be mentioned too, although I do not believe price movement can be predicted in the short term with the fundamentals. Rather it is more correct to assume that the market's evaluation of the fundamentals are reflected in the recent price action.
Gold's recent price history
Gold peaked August 22, 2011, followed by a 16 month period of topping with a series of lower peaks until Oct. 4, 2012 when the serious decline began that included precipitous declines triggered by massive, orchestrated "shock and awe" futures contract bombing/dumping at key support levels. That these selling events occurred and were not normal selling activity is a matter of record.
Gold's decline seen relative to the 200 day moving average
As I said, I would be looking at the price action of gold as per the price of GLD. One way to look at price is in absolute terms as in highs or lows. Another way that compliments the actual prices is to look at averages of prices. The 200 day average is an important average that reflects trend and is used to evaluate if an investment is in an uptrend or downtrend. In the chart below the 50 day and 200 day averages are shown.
February 8, 2013 was the last time GLD traded above its 200 day moving average which was 161.57 at the time. In the dates from Feb. 8 to Feb. 21, GLD dropped from the 160 level to the 150 level as it became apparent that the "death cross" would occur in a matter of several days.
Since Feb. 11, 2013 it has been in a technically confirmed bear market, apparently bottoming on June 28, 2013 at $114.68. I say "apparently" because that was now six months ago and gold and GLD have NOT made lower lows since then.
The 200 day moving average of GLD is moving down to, and now approaching the actual price trading price range of GLD.
Gold's Decline and possible bottoming at year end 2013
Gold's price is on course to meet the 200 day Moving Average soon, after 10 months.
GLD 's 200 day MA is now is at $133.11 and is still dropping steeply at a rate of about 10 points every two months which would put it at about $123 at the end of February 2014. Gold made the second bottom Dec 3 at $117.23 holding above its June 28 low in the face of year end selling and may have faced most of its selling pressure for the year end. That means that the price of gold or GLD and the 200 day MA may be on course to intersect soon. GLD had already popped above its 50 day MA back in August by as much as $10 and is only about $5 below it now.
Price action since June 28 bottom at $114.68
A second, higher bottom occurred very recently December 3 at $117.23 presenting a tentative double bottom.
The simplest definition of a rising trend is a series of higher lows with a series of higher highs. It begins with a short-term rising trend, then continues to a longer term rising trend. So far since June 28, the last low on Dec. 3, was higher than the previous one on June 28. If prices proceed up from the Dec. 3 low, that will be the first confirmation of a change in price trend.
If gold and GLD move up on near-term price action and once again clear above the nearby 50day MA, the short-term technicals should carry prices up to the 200 day MA around GLD 130. From around GLD $119 that would be slightly less than 10% gain, but it could come quickly.
GLD will encounter resistance at $130 and at the 200 day MA and would retreat from it initially. After this encounter with the 200 day MA one would look for gold to trade down to the 50 day MA. If it finds support here or trades sideways, one would look for gold to make another try to clear the 200 day average.
I am looking for gold & GLD prices to "compress" under the 50 day MA perhaps for a week or two longer until the end of 2013. If gold prices hold, then I am looking for a break above the 50 day MA. I have already bought some and will add some (NYSE:SLW) here too.
Possible downside for Gold
Failure to recover to the 200 day average and move above the downtrend line may result in another sell-off. A price breakdown to or below the June 28 low of $114.68 would not be good for gold/GLD.
If it did sell-off below the June 28 low, it looks like the next support level for GLD would be around $100. This is the top range for GLD during 2008.
But to those who are skeptical that gold can recover and say that gold must go down, I would simply ask,
- Why then has it now done so by now? and
- When is it going to go down after holding above its June 28 for six months now?"
Prices in the last six months however at this time give reason to speculate on further price gains if only the current levels hold and move up from here. If initiating a GLD or GDX trade at this level, I would be prepared to exit positions if prices drop below the Dec. 3 low of GLD $117.
The upside challenge for gold is to rise above the descending 200 day MA and confirm a new uptrend. In that event, any buying here would be in the bottom area.
Fundamental reasons supporting gold:
These pertain to the U.S. economy:
- Improving economy (though at slow pace) for the present, indicates that deflation is not an immediate worry.
- Weak employment performance with the rate holding around 7% while the Fed's target is 6.5%, means that tapering QE may not happen soon. And even if tapering occurs gradually, the Fed is likely to keep interest rates low so not to jeopardize economic recovery.
- Divided Congress and recent compromise to prevent new government shutdown points to "business as usual," e.g. more deficit spending with the debt continuing to increase.
- A continuation of the ascension of the stock market implies that there is speculative money available to bid asset prices up. Where this money may be coming from is open to discussion, but the market has been climbing steadily.
- Further rounds of easing by major central banks(1): ECU, Japan, Australia
- World demand for gold remains steady in the West(2) with strong Asian demand(3)
Look for year end stories citing 2013 as being the worst year ever for gold, and pointing the finger at gold as the worst investment of the year, as the media tries to stomp gold's image into the mud - even as central banks and the rest of the world continues to buy gold and hold it.
Look for a replay of the "Huge Gold Drop" stories to reinforce the "gold is dead" thesis. All of this will be coming in year-end 2013 stories from the same people who told you Cyprus was going to sell its gold.
Example: Dec 16, 2013 Gold Funds See Unprecedented 31% Slump With World Losing Faith
Why believe them now?
Look for old news to be warmed up and re-served while new trends may be ready to begin.
Watch for the price of gold to contradict the media's gold bashing in the last days of 2013 and the beginning of 2014.
-But at the same time observe the support levels cited above if gold does not commence a new trend up.
--Best wishes for a prosperous 2014.
Disclosure: I am long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.