It's Game Time For Gold
As is normal for early January a sense of optimism prevails, and although some acknowledge the potential for a further quick drop and reverse in the price of precious metals, I would say that the general consensus for gold (GLD-NY) and silver (SLV-NY) is a bumper 2015, and a big rally that is likely underway already.
Far be it from me to ruin the party atmosphere in the metals arena, but I can't in all good conscience write what I don't feel to be true. Last week my forecast was for slightly higher levels before we begin a drop to test the November lows, and my opinion has not been changed by the action this week. Since that article was published, gold rose as forecast to gain just over 1% and hit $1223 at its peak, which regular readers will know is the lower range of my target zone for this current move higher.
This week my article comes with a warning to traders not to marry your gold positioning, as I feel that what happens in the next two weeks will ultimately decide where gold heads over the next two months. Not only do we have an EW chart pattern potentially about to complete (or invalidate), but there are some big events coming our way that will doubtless act as catalysts for price movement:
Will Super Mario Save the Eurozone?
Actually, the better question is probably can he (or anyone for that matter) save the day. The Governing Council of the ECB meet in Frankfurt on January 22nd, and as usual this is followed by a press conference at which ECB President Mario Draghi will be asked for fresh comments regarding the economic climate and prospects for the future in Europe.
As background, the inflation rate in the Eurozone has gradually moved lower since 2012, and crucially has remained below the European Central Bank key 2% target. The European Commission recently released the results of a poll that shows a diminishing number of those living and working within the Eurozone (getting close to zero now) expect inflation within the next year, and for the first time since October 2009 when the effects of the 2008 financial crisis were still fresh and being felt by all, recent figures show that consumer prices were on average lower than 1 year ago.
In a climate such as this the velocity of money slows as people are disinclined to take risks, meaning there are lower numbers of small businesses being started, lower demand for loans/mortgages from banks, and more hoarding of savings from those trying to protect what they have spent lives building up. All of this leads to fewer jobs being created, less revenue being earned by established businesses, and thus less disposable wealth flowing through the economy - a vicious deflationary circle.
Mario Draghi has tried to pacify with a pledge to 'do whatever it takes', and now more than ever he will be expected to take some form of action. However, with interest rates already negative and a quantitative easing programme already in place, just what action can he take to spur the economy into life? Will flooding the Eurozone with more money have the desired effect? I'm not so sure.
The situation is further complicated by on-going problems in Greece, and with Greek elections taking place on January 25th, Mr Draghi may have his hands tied until the results are in, and is probably going to disappoint the markets on January 22nd as a result.
The Greek situation is a tough one to resolve. Greece was hit hardest in the Financial Crisis as it had over-extended itself with regards to loans, and now struggles to make repayments. As of the end of 2013, Greece's debt to GDP ratio was 175% i.e. the total amount of money generated by the Greek economy each year amounts to just over half of the debt it needs to repay. As with the rest of the Eurozone, unemployment (especially among the under 30's) is at very high levels, so the prospects for increasing GDP in the short term is not so good, and the Greek government is left with no choice but to make more and more budget cuts in order to qualify for balloon payments from the EC and IMF that allow it to remain solvent.
Bond yields have risen as dramatically as stock prices have fallen, meaning it now costs the Greek government more and more to be able to make repayments on their existing debt. This has crippled their economy, is obviously very unpopular with the people, and has given rise to the anti-austerity party - Syriza - the leader of which (Alexis Tsipras) recently said the following:
"..as to markets perception, the issue of debt negotiation is fundamentally important.. That's what was done for Germany in 1953, it should be done for Greece in 2015."What he is essentially arguing for is Greece's debt to be at least partially written off, referring to the London Debt Agreement whereby Germany was granted debt relief after WWII, which would then involve non-payment of debt to creditors within the Eurozone.
Should the Syriza Party gain power on January 25th, we are likely to end up with a Euro debt default and potentially Greece's withdrawal from the Eurozone altogether i.e. an immediate massive reduction in the Euro monetary base.
Over the last 2 years Europe has wondered just what action Mr Draghi would take, given that he has so far done little despite stating he will do 'whatever it takes', so perhaps he has been saving the giant QE programmes for just such a situation and will balance this impending reduction with billions of new money hot off the presses? We will soon find out.
The point of the above issue is to show that in the face of low monetary demand and high risk debt in the Eurozone (deflation), people have been abandoning the Euro in droves and looking for safe haven elsewhere. Remember, people act in anticipation of forthcoming events rather than waiting for an event to happen before taking action, and a quick look at the Euro FX chart shows that the trend is very firmly down.
(click to enlarge) 
This last week the Euro decisively broke 9 year resistance, and looks like it is heading lower fast. Only a move back above 1.25 would delay the collapse, a collapse that is surely coming anyway as the Eurozone situation worsens. And if Euros are being sold, just what is being purchased with the proceeds? Pounds? Rubles? Yen? Gold?
No. The biggest beneficiary of proceeds from the sinking Euro has without a doubt been the US Dollar - the world reserve currency. Should Mr Draghi say the wrong thing, or fail to placate the markets this time, we could be seeing a HUGE move lower in the Euro and higher in the US Dollar, a move that would heap pressure on the price of gold, and may just be what tips the balance back in favour of the bears.
US Bond Markets Continue to be the Safe Haven of ChoiceWe hear it all the time - why would I want to hold an asset that doesn't produce an income, and in fact costs me money in storage and insurance? It's a valid point and true. In my portfolio the only time I want to hold gold is when I think the price will rise. I don't hold it through the years in case of an end of the world type scenario. Although many money managers advocate 5-10% in gold at all times, I doubt all of them actually keep to that allocation.
At present, if you live outside the United States and need a relatively safe income producing asset, with gold prices having declined these last 3 years, you are more than likely holding bonds issued by your own government, and in your own currency. In the case of the Eurozone, bond money has migrated to those countries deemed safest (Germany mainly). However, what happens when your domestic economy comes under threat?
In those circumstances you would be looking for another more suitable asset that would still generate the income you seek, give safety, and if possible be denominated in a currency that is appreciating against your own.
20 year US Treasury Bonds (TLT-NY) performed very well last year, and in light of what is happening with the Euro, you can well imagine that trend will continue. Bonds seem to have been derided in the media as equities have performed well, but rather like the US Dollar, all calls for a top and subsequent decline have been disappointed. It would appear that money has not been migrating for safety into gold, it has been buying US bonds instead.
(click to enlarge) 
Faced with troubles around the world, it is likely that US Treasuries will become more and more popular, and other non-income producing assets, especially those priced in US Dollars, will continue to decline. Faced with the trend currently in play, it only hardens my opinion that US Dollar strength will continue and gold will make lower lows in 2015.
Data PointsRegular readers will be familiar with the data I monitor to help forecast the gold price, but for those who need it, an explanation of these metrics can be found here.
COT
The Commitment of Traders report this week is very bearish for gold.
As we can see from the table below, the Commercial Trader category increased their short position by a whopping 14,000+ contracts, although they balanced that somewhat with the addition of 4,600+ long contracts. This means that they increased their net short position by roughly 9,500 contracts.
COMMERCIAL
| | LARGE SPEC
| | SMALL SPEC
| | | | | | | | | LONG
| SHORT
| LONG
| SHORT
| LONG
| SHORT
| 130,427
| 253,099
| 187,705
| 65,527
| 34,990
| 34,496
| | | | | | | | CHANGE
| CHANGE
| CHANGE
| CHANGE
| CHANGE
| CHANGE
| +4,609
| +14,147
| +4,808
| -1,533
| +382
| -2,815
| | | | | | | |
On the flip side, the Large and Small Trader category decreased their short positions and added more long contracts.
We can infer from the report that the Commercials continue to view this current rally in gold as weak and expect a drop in the near future, while the other trader categories have started to believe in the sustainability of the current rise, and have bet accordingly.
Over the long term, the Commercials tend to be correct most often with their positioning. Since they increased their net short position last week also, traders should be wary of a large forthcoming rally.
GOFO
Backwardation is no longer in play, with all contracts now in positive territory. This means that the slight shortage of physical gold we experienced over the festive period is over and no longer acting as support for the price of gold.
Gold Miners
Charts for both the gold mining majors (GDX-NY) and juniors (GDXJ-NY) are below, and as with the price gold I have not changed my opinion on being close to a top and about to start a retest of the November lows, and possibly even new lows.
As forecast last week, both went higher and are now in the target boxes. Both charts show technical negative divergences, although I believe they can go a little higher before they top out.
For GDX the upper target range has been slightly increased to 21.73, although I am not absolutely sure it will get that high.
(click to enlarge) 
For GDXJ the targets are broadly the same (29-32), but if anything I would say that the juniors have underperformed the majors on this rise, which indicates a lack of demand or strain in the higher risk gold miner category, and I would expect us not to hit the upper target levels.
(click to enlarge) 
The gold miners tend to move in anticipation of changes in the gold price, so you may find that they top and start to move lower prior to the top in gold itself.
Gold Chart Pattern
An updated chart for gold is included below. The count has not changed, but I have added Fibonacci fib targets for this current rise now that wave C appears to be underway.
(click to enlarge) 
The resistance zone looks to be between $1240 and $1262, with the ideal target being $1251, but you should note that we have already fulfilled the minimum target for this rise, and it is possible we head lower without hitting higher targets.
Once this pattern completes, I expect us to head lower and try to break $1132. If we do not manage to break that level, it could indicate that wave 3 of 5 completed at $1132, and we are now in a bigger wave 4. This would mean a long range-bound trajectory between $1132 and $1251. The miners would probably rally nicely if $1132 is not broken.
Although it is not my primary expectation, if at any time we breach $1262 and sustain trade above that level, and we then break through $1280, my alternate count ( detailed in this article) would become primary and I would be looking for much higher targets in both gold and the gold miners.
By Ben Lockhart |
