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In
the not-so-distant past arguing that precious metals prices were setup to
fall generally elicited a response which was not real pleasant. In fact,
during gold’s infamous bull market rally on several occasions I called
for pullbacks which regardless of the accuracy of my call generated hate mail
that seemingly never ended.
Fast forward to
the present and hardcore gold bugs remain transfixed on the idea that
precious metals must rise. The gold bull market has ended, at least for now
and those still holding the bag are looking at large losses from the all time highs set back in 2011.
These same gold
bugs will cite a litany of reasons why gold should be moving higher from the
unprecedented printing of money by global central banks to the deficit
spending and eventual fiscal day of reckoning facing most Western nations. I
do not disagree with the gold bugs that in the long run gold prices will
rally above the all time highs, but in the short to
intermediate term there are several forces which have the potential to drive
gold prices lower.
Gold prices
cannot rise continually,regardless
of the macro-economic backdrop. Nothing, not even Apple Computer (AAPL) or
Priceline.com (PCLN) will rise forever. Eventually prices will come back down
to earth and revert to the long term mean. It has happened in gold and it
will happen to Apple Computer and Priceline.com at some point in the future,
it is simply a matter of time.
Before I
discuss my reasoning as to why gold and silver are likely to pullback in the
intermediate term, I need to remind readers that I remain long-term bullish
of precious metals. While the long-term remains bright, the short-term is
especially murky and dark.
The first
primary concern for gold bugs should be the price behavior of the U.S. Dollar
Index recently. The Dollar has rallied sharply higher after carving out a
higher low on the daily chart (bullish). The Dollar is on the verge of
breaking out above a major descending trendline on
the daily chart. Once that breakout to the upside has occurred it will become
likely that the recent highs will be tested and possibly taken out. The daily
chart of the Dollar Index is shown below.
Dollar Index Daily Chart
The U.S.
Dollar’s price action shown above is not indicative of bearish
expectations. In fact, I would argue that the Dollar is, and likely will
remain in a bull market in the short and intermediate time frames. However,
it is important to recognize that strong periods of volatility will persist
as Ben Bernanke and the Federal Reserve will continue to try to break the
Dollar’s rally as it tries to grind higher.
The Federal
Reserve hates deflation, and a stronger Dollar will push risk assets like
equities lower and right now that is not part of the Federal Reserve’s
election playbook. QE III will likely be announced at some point in the
future as an attempt to break the Dollar’s rally and to put a floor
underneath stock prices.
The Federal
Reserve has used QE I and QE II to help prevent economic disaster. Recently
“Operation Twist” has also been used to increase liquidity while
keeping the bullish game going. Low interest rates and additional easing
adjustments have staved off disaster before and they will likely be utilized
again by the Federal Reserve.
Ultimately the free
market and cycles will exert their will and the Federal Reserve will be left
helpless. The day where monetary easing has no major impact is coming, but we
are not quite there just yet.
In addition to
the strength in the Dollar Index, the gold miners have been under major
selling pressure. In fact, the gold miners have recently broken down out of a major consolidation zone that will likely lead to lower
prices in the near term.
Unless gold
miners can regain the breakdown level on a major reversal this coming week,
the most we can hope for is a backtest of the
support trendline sometime in the near future once
the miner’s become significantly oversold. The weakness in the miners
is just another example as to why lower prices for gold appear to be likely in
the short to intermediate time frames. The weekly chart of the gold miners
ETF is shown below.
Gold Miner’s (GDX) Weekly
Chart
The gold miners
are likely to lead equity markets lower in the near term, but lower prices
for gold miners is certainly not positive for gold either. Obviously there
are several economic factors which could still see gold prices working higher
such as a collapse of the Eurozone, however at this moment the likelihood of
that outcome in the short to intermediate term is not likely.
The European
Central Bank and the Federal Reserve are not going to give up that easily.
The process of admitting defeat will take time and global central banks will
print money until they feel they have papered over the issue. It is the
culmination of either QE III or other monetary easing around the world that
will eventually move gold back above the all time
highs. Unfortunately the short term price action of gold will most certainly
remain under selling pressure barring any major unexpected announcements. The
daily chart of gold futures is shown below.
Gold Futures Daily Chart
As shown above,
I believe that short term targets to the downside are likely somewhere in the
1,475 – 1,525 price range. I think gold will find a major bottom near
these levels and a strong bounce will play out. For long term buyers, I would
take advantage of the forthcoming pullback. However, I would be mindful that further
selling is quite possible before gold finds a major bottom.
As I said
before, the longer term is bright for gold. However, the short to
intermediate term will likely see more selling pressure. Until either the
Dollar tops or some form of major quantitative easing is announced, I would
anticipate lower prices in the yellow metal.
In the near
term gold does not look attractive, but the longer term the catalysts for a
major move above recent highs are present. The real question has become when
and where will the Dollar top? When the Dollar tops and gold finds a major
bottom, the potential for a monster move higher will become likely.
Until then,
risk remains high.
JW Jones
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