I should begin by noting that I did not expect this bear market in gold, which began after the highs past $1,900 were reached in 2011, would last this long. In fact, I did not expect it to come at all; I simply anticipated some consolidation before soaring past $2,000. The drop below $1,500 was something I found especially surprising. And painful, given that I made some of my largest purchases of gold and gold stocks when gold was at $1500.
While hindsight clearly shows that I should have timed my entries differently, or at least coupled by position in gold with some type of hedging via options, I am still quite confident that the trades will ultimately leave me with greater purchasing power -- even after discounting for time held. In this post I'd like to outline the case for why gold may be bottoming.
1. Gold did not form new lows on the mini-taper announcement. From a technical perspective, we see that gold is now re-testing support in the $1175-$1200 range, and it seems to be holding this level. It is vital that gold continues to hold this level; if it fails to, a move to $1,000 seems quite possible.
Fundamentally, that gold did not form a new low even after the mini-taper was announced is, in my opinion, very significant. The trend in gold is clearly bearish, and some of the most bearish fundamental news was released -- yet the price of gold did not form new lows. This strikes me as the foundation for a bottom, as the news was already priced in. For gold to head lower, I think bears will need to find more news to drive it below the formidable support level at $1,200.
2. The best gold stocks are NOT re-testing their 2013 lows. I'll do an entire post on this, but it looks like the best gold stocks are not re-testing their lows -- in spite of the fact that gold is. This development is occurring across the spectrum of gold stocks; from prospect generators to royalty firms to major miners, and from small cap to large cap. This bifurcation in gold stocks suggests that the winners are separating themselves from the losers, and that the winners are ready to take off. The winners can only take off if the price of gold is deemed to go higher. This is particularly true for large cap miners, who are more sensitive to the macroeconomics of the price of gold than tiny explorers may be.
3. The Yellen factor. As numerous other commentators have noted, what Bernanke has done here is basically pass a giant problem on to Yellen. Some type of tapering was needed to make good on the (false) promise that the economy is actually recovering. However, I do not think Yellen can continue to taper, as I do not think the economy can get on the path of self-sustaining growth without first clearing out some of the massive amount of debt. Revolving and non-revolving debt are still increasing. The transition to Yellen, especially in an environment where she is inheriting an unsustainable taper, is another possible chaotic event that could serve as the catalyst for higher prices.
4. JP Morgan has begun aggressively buying physical gold. Starting in August, JP Morgan has begun aggressively adding gold eligible for delivery to its vault in COMEX. That Morgan has switched its position here is another sign that the market may have a catalyst to send prices higher, and that "smart money" -- i.e. the kind of money that can actually move markets -- may be returning to the long side of gold.
Lastly, amidst all the noise, remember the simple truth: the US economy is insolvent. It cannot pay the $17 trillion in debt it has accumulated on a cash basis, let alone the $200+ trillion if we use standard GAAP measures of accounting that include the fiscal gap (i.e. promises to spend less anticipated tax revenue). Gold is a hedge against this insolvency, as well as the potential centerpiece in a new international monetary agreement that restructures debt. The time to sell gold won't come until the debt is dealt with, either through cancellation or a new international monetary agreement.