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The price action in gold and gold miners over the past six months has many investors turning their back on the precious metal.
Gold fell below $1,600 last week to reach a six month low, prompting many to step back and wonder aloud if the precious metal’s decade long bull market has officially come to an end.
With the price of gold now back to where it was in July of 2011, it’s time to decipher whether a gold rally is on the horizon, or if it’s time to head for the exits.
Three Reasons Against a Gold Rally:
1. It has now been well reported that some hedge fund managers liquidated gold holdings in late 2012, and SEC filings show this to be accurate. George Soros sold half of his holdings in the SPDR Gold Trust ETF (GLD) in Q4 2012. Sales like these “…bolster speculation that gold’s 12-year bull-run is coming to the end”, according to Bloomberg. It may be right.
2. Speculation is rising that the Fed will end asset purchases, which currently stand at $85 billion a month, in mid-to-late 2013. Removing some of this “excess liquidity” would likely reduce the fear trade that has pushed investors toward gold.
3. The evidence speaks for itself – gold and gold mining stocks keep going down and are breaking through technical support. Physical gold’s price fell to a 6-month low last week, and gold mining stocks are falling even faster, breaking to a 9-month low last week. There is no reason to catch a falling knife, as they say.
Three Reasons For a Gold Rally:
1. Soros may have sold his gold holdings because he saw a better use of the capital, specifically in the Japanese yen. In late 2012, Japan’s new leader, Prime Minister Shinzō Abe stated his goal to drive down the yen. Spurred by Japan’s policies, the yen fell, driving up the price of gold as denominated in yen by nearly 20% over six months. Over the same period gold denominated in U.S. dollars was flat. The Wall Street Journal reported that Soros was on the right side of this trade, gaining “…almost $1 billion on the trade since November (2012).”
2. According to the U.S. Global Investors “oscillator model” gold has corrected far enough and has entered a potentially profitable buy zone. The model indicates that gold has dropped 2 standard deviations on a year-over-year basis. “An event like this has happened only about 2 percent of the time over the last 10 years … following these extreme lows, gold has historically increased as much as 15 percent over the next year“, according to the mutual fund group.
3. Central banks around the world are still buying gold. The WGC reports that in 2012, central bank demand was 534 tons, the highest recorded since 1964. Demand was high in emerging markets including Brazil, Mexico, Brazil, South Korea, the Philippines and Russia, which now has the 8th largest gold reserve in the world. Central bank buying is a good showing of confidence in gold.
Conclusion:
The technical evidence suggests that the price of gold may soon move to the upside and a gold rally may begin. I wouldn’t bet against a rise in gold’s price, regardless of what hedge fund filings show. Nothing happens in a vacuum. That said, a reversal isn’t guaranteed. For these reasons I’m neutral on gold right now.
However, the performance of gold miners is troubling. Bullish indicators, such as takeover bids and dirt cheap valuations still haven’t led to stabilization in the sector. When a turnaround comes, there will likely be plenty of time for investors to get into these stocks, so I see little reason to load up on gold miners now.
This week I’ve advised subscribers to Pay Dirt not to stray from gold unless they need to rebalance their portfolios. But I’ve advised them to steer clear from the miners for now.