Has Gold Fallen in a Secular Bear Trend?

Gold has suddenly taken many people out of their summer dreams. Not because of the 20% correction of gold expressed in dollars (we have seen similar reactions in the past), but rather because it all happened so swiftly without any consolidation or correction, and because on its way to the 64-week moving average, it simply ignored all technical support zones.

On the PF chart the selling climax is a straight line down. In these volatile financial markets it is good to be stubborn but this kind of event must make one think and reassess the situation if so needed.

The August seasonal factor has, whether or not assisted by the PPTeam, definitely played an important role. Historically, Gold sees a bottom during late summer and it seems that after all this year won’t be an exception.

Professional gold miners judge that selling their production forward will continue to cost more than it will yield. Hence, they are one after the other in closing their hedge books. It's a stupid decision if gold would have fallen in a secular bear trend.

The dollar may still be labeled as a reserve currency (reality may be different), but today it would be a huge mistake not to accept gold in quoting other currencies: Yen, Euro, Sterling, Swiss. Looking at these charts, as of August 12, the secular bull trend is intact, alive and well.

Nothing goes up in a straight line, but nothing goes down in a straight line either. Gold, silver, and gold and silver shares are ‘heavily oversold’. In two weeks time, August will be history and at the beginning of September, there will only be four months to go before the New Year. This period and the beginning of the year traditionally see the strongest up leg for gold and silver.

Real interest rates are still negative and no changes are visible at the horizon. Due to the weakening EU economy, the ECB will probably halt any further rate hikes and a Volker effect (double digit interest rates) would just slaughter the American economy. Having said this, assuming the Fed does hike the interest rates, gold would still be one of the few investment vehicles able to rise in tandem with these.

We all know the financial system still has to overcome the worst: the credit default swaps. Problems around Fannie (FNM) and Freddie (FRE) haven’t been solved yet. With the help of accountants and any possible potential tricks, financials are desperately trying to wash the red ink out of their books. Meantime, the Fed and the ECB have decided to keep bailing them out.

The real estate bubble that keeps on deflating in the USA and the UK has also started in the EU. Even Greenspan confesses it has way to go.

In the USA and Europe, monetary inflation is growing at a rate close to 20%. Published core cooked inflation figures are hovering around 5%. But everybody with some brains knows it is way more. Double digit price inflation figures are seen in many other countries of the world.

I would not be surprised to see price inflation accelerate again during the last quarter of 2008. Even after the present correction, Crude oil prices have more than doubled and the result of this will clearly become visible towards the end of the year. Whatever is said, we have peak oil and what the western world saves is used by China and India. Hence, it is extremely dangerous to talk about demand destruction.

As much as gold and silver are in a secular bull trend, stock markets are in a secular bear trend and not the ideal place to keep one’s savings. Nominal bond yields are lower than published core inflation rates, and aren't an ideal place to place one’s savings either. Saving accounts aren’t any better and real estate hasn’t seen its bottom yet.

The 64 week moving average has been a support ever since the beginning of the secular bull market for gold. Today, my opinion is that this mainstay will hold again.

Comments

[phillips49:]

Let us not forget that gold traded pretty flat for the 22 year period from 1982 to 2004, regardless of inflation, economies and currency exchange rates. The creation of gold ETF's in late 2004 really created an artifical market for gold where everyman could participate without taking physical possession. Click I'm, click I'm out. This in itself drove gold prices up by creating new demand. Check the charts yourself. Soooooo, if everyman decides to head for the hills and stash his cash, gold will collaspe as the ETF's sell off their holdings. Investors have been bailing out of all asset classes due lack of confidence and fear. Since everything is only worth what someone else will pay for it, we really depend on the guy next to us to hold or buy to preserve our own investment. If he gets scared and pulls out, then the value of what we hold falls until we get scared and pull the plug as well. The last one out the door is left holding the bag.

2008 Aug 13 09:35 AM

[buyitcheap:]

I agree - this is a normal pullback in a much larger uptrend...

2008 Aug 13 09:36 AM

[Francis Sch...:]

One cannot compare todays Gold with the 1980-2003 era where we had a secular bear market and a low market participation.

There ain't a split second in my mind that ETF's and other derivatives have together with e-trading, highly increased the leverage and hence also the volatibility on Gold. for the future, better keep you breast wet.

2008 Aug 13 10:33 AM

[Dean Plassaras:]

History tells us that during commodities boom cycles, typically lasting for 15 years or so, commodities other than gold outperform gold in the initial phase. It is in the later phase of those cycles that gold outshines.

2008 Aug 13 11:21 AM

[User 30121:]

Thank you, Thank you, Thank you Francis for a lucid, even-handed look into the Gold situation and outlook. I couldn't agree more. Your assessment is without fault.

Too bad the nay-sayers are gloating in the wings because of Gold correcting. What they REFUSE to acknowledge is the FUNDAMENTALS which depict a BULL market...Soon the anti-PM crowd will rue the day they didn't join us....

2008 Aug 13 02:01 PM

[GMiki1:]

Panic and programmed selling. The longterm uptrend holds.

2008 Aug 13 02:47 PM

[secmaven:]

Shorting on the Comex by the offshore central bank sponsored customers of the 8 or fewer bullion bank traders is the main reason for the "correction" in gold prices. When China and Russia go their own way and start to accumulate gold aggressively the angle of incline on the current bull market in gold will adjust upward. If the US is happy to sit on the biggest pile of gold in the world year after year without so much as one ounce leaving that pile, at least according to government data, this is a lesson to other countries. Why should they be sellers an not buyers?

2008 Aug 13 02:59 PM

[Tom Szabo:]

Shorting isn't what caused gold to drop in price, it was long liquidations. The shorts actually covered in gold, as evidenced by a big decline in open interest. You can't have a decline in open interest without short covering--otherwise it is just longs selling to each other and there is no decline in open interest. What's interesting is there has been no drop in open interest in COMEX silver even though it has declined by a much larger amount than gold. You'll have to search around a bit, though not too hard, for my theory why.

2008 Aug 13 08:38 PM

[Tom Szabo:]

A secular bear "trend" would only become obvious in the rear view mirror after a few of years. Well informed individuals were still writing in the mid-1980's about the continuation of the great gold and silver bulls. The proper question is, have the fundamentals that support the secular bull market in gold changed? You answer the question more than adequately. Yet none of these supporting fundamentals can prevent gold from going down another 10%, 20%, 30% or more especially if they have already been fully discounted by the market place. I don't think people talk enough about the concept of gold being an efficient discounter of the future, but that is truly what drives the gold price beyond anything else.

2008 Aug 13 09:13 PM

[Francis Sch...:]

There is growing evidence indicating that there was unannounced intervention in support of the dollar.
Given a sharp drop in euro holdings in the U.S. Treasury's Exchange Stabilization Fund, it seems that the U.S. Treasury may have intervened in the currency markets, possibly out of fear that a more significant run on the dollar could have resulted.
Any intervention deal would more likely have been arranged with the Saudis during the recent Bush-Cheney visits. All that this would have required is sufficient buying commencing in mid-July to squeeze USD shorts and creating a momentum move on the upside. This action had also implications for Gold.

2008 Aug 14 09:02 AM