While some headlines are predicting the end of the bull market for gold, many commentators remain bullish on the yellow metal and all agree that more volatility should be expected
Author: Geoff Candy
Posted: Thursday , 15 Dec 2011
GRONINGEN – As gold prices plunged as much as 3.5% in trade yesterday, permabear and economist, Nouriel Roubini, was engaging in some gold bull baiting on Twitter.
“Gold at a 7 weeks [sic] low down to 1635. Where is 2000 gold dear gold bugs?” He said, and, later in the day, “Gold bugs in hiding as gold prices plunge.”
At roughly the same time gold mining entrepreneur Rob McEwen in a talk to the Geological Society of Nevada, stood firm on his prediction that gold prices would hit $5,000 over the long term
McEwen and Roubini represent polar opposite visions of the metal that are long held and well reported on and so their sticking to their guns came as little surprise. More noteworthy in the context of the second-worst rout in the metal since the 2008 financial crisis were the recent comments by author and economist, Dennis Gartman.
In his most recent letter, Gartman was quoted by Bloomberg as writing, ” “Since the early autumn here in the Northern Hemisphere gold has failed to make a new high. Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull.”
He went on to add that while buying in China rose significantly in October, the news of the surge failed to move markets, “Buying of that sort should have sent gold prices soaring,” Gartman wrote. “One of the oldest rules of trading is simply this: a market that cannot or does not respond to bullish news is a bearish market not a bullish one.”
The question now becomes, are the recent falls a sign of a longer term pull back in the metal, or rather a shorter term move brought about by year-end squaring and liquidations by the more speculative longs, in order to cover other loss-making positions.
While Gartman has turned bearish, many other commentators remain positive about the longer term outlook for the metal.
UBS’s Edel Tully wrote this morning, “Our core view on gold remains bullish. We forecast an average 2012 price of $2,050. Most of the factors that pushed gold higher in 2011 are not going away. Indeed, a compelling case for higher gold returns next year can be built on: persistent sovereign stress, an expected recession in Europe, benign growth across developed markets, a relatively sedate outlook for competing asset classes, still-low interest rates in the US, and further rate declines in Europe, as we expect. Adding to the mix another of our expectations – that central banks will maintain their 2011 gold buying spree – makes gold a compelling investment thesis.”
However, while the bank remains positive on gold it has lowered its average gold price estimates for both 2011 and 2012 by 2% and 1% respectively to $1,570/oz and $2,050/oz.
And, overall, the group is more bearish on commodities in general, ” Two of our most important signals for the miners and commodities have turned negative. Capital is flowing out of emerging markets and back to the US, undermining commodity demand – because macro data and credit conditions there are improving, making an imminent commodity-supporting ‘QE3′ unlikely. Meanwhile, European bank deleveraging promises more credit stress, directing commodity consumers and traders to destock. Right now, commodities need support from either a resurgent China or a substantial, US/European-led QE programme.”
Standard Bank, writing in its daily commodities note yesterday said of the weakness in the yellow metal, We believe that this downward pressure is likely to remain in place. Physical market demand from India and South East Asia continues to pick up, with gold below $1,650 providing support at this key technical level. However, as pointed out yesterday, the pick-up in demand is from relatively low levels, and overall demand remains well below levels seen in October.”
But, as it points out, “While gold in dollar-terms is under huge pressure, gold in euro-terms only shed €20. Market sentiment and momentum has also turned bearish on gold, reflected in the short-dated gold skew where puts are in high demand relative to calls.”
Silver specialist and precious metals commentator, David Morgan, speaking on Mineweb.com’s metals weekly podcast, described the situation currently being seen in markets as one of “wait-you-out or scare-you-out.”
He explained that either markets will “scare you out” with huge drops that are very rapid – or “wear you out where you get these long consolidations where silver and/or gold do not make new highs but the fundamentals keep getting better and better.”
Currently he says, there is a lot of fear in markets and, while a minority of people view gold and silver as the “ultimate cash” most of the world’s population view currency as such and, as a result, when there is a liquidity squeeze markets move into cash.
“There’s a rush from any asset – real estate, stocks, bonds, even metals, and especially paper metals, into the monetary base or the ultimate monetary base which is the currency. And that puts a lot of pressure upward in certain currencies like the US dollar because right now it’s perceived to be the safest… I believe this is an intermediate term situation which puts pressure [downward] on the gold and silver price and also puts pressure upward on the currencies, especially the ones perceived to be the strongest and safest.”
All in all, while a lot of commentators remain bullish long-term there is a significant amount of fear present in markets, especially as we head toward the year-end. As usual coming up to and during the holidays emotions are high and when you mix in a continued crisis in the euro zone, looming debt problems in the U.S. and the frantic scramble to square the accounts before December 31st, it is safe to guess that markets are both scared and worn out. How long that will last though, is anyone’s guess.