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Strategies & Market Trends : Dino's Bar & Grill -- Ignore unavailable to you. Want to Upgrade?

To: Goose94 who wrote (1710)	7/2/2013 9:30:19 PM
From: Goose94	Read Replies (1) \| Respond to of 202923

Gold: Why has it dropped so much? As stated, the market’s reaction to the Fed policy has been grossly overdone. But why has gold declined? There have been three discernible downdrafts since late last year when gold moved back up to its highs (other than the exaggerated rally in early September 2011 after the European debt crisis hit the headlines again following immediately on the S&P downgrade of the United States). These are: first, in the early part of the year ("the great rotation"); second, the sharp two-day plunge in mid-April, caused by heavy COMEX selling; and third, the end-June collapse under $1,200 after Bernanke’s comments. There are specific reasons for each, and there is an overall backdrop. Before we get to that, let’s just comment on gold’s mid-April plunge, which made holders nervous as well as taking over $200 off the price of gold in two days. I am not a fan of convoluted conspiracy theories, but let’s just say that, whether this was a central bank trying to destroy gold’s credibility or a very smart speculator who had bought large numbers of puts on gold, the selling on the Friday, in thin markets after London had closed, was anything but price-maximization selling. Perhaps it was just someone who owned 400 tonnes and was clueless as to markets. Lots of reasons for gold to have fallen As to the broader backdrop to gold’s weakness, there are several reasons. • Concern about a reduction in stimulus and eventual exit • Slowdown in the growth of global money supply, particularly in Euroland • Rotation from gold and resources to stocks as the economy improved • A firmer dollar • Rising long-term rates in the market • Negative analyst reports from major investment firms with ever-lower target prices • Cascading sell orders, including some stops hit, by shorter-term investors. As these factors piled up on each other and the price steadily (and not so steadily) declined, sentiment changed, and with that every market development was seen through a bearish prism. But in reality very little has changed—particularly in the most important factor of monetary policy—little, that is, except the price. If gold moved ahead of itself in late 2010 and 2011, it has now overshot on the downside. In an era of low interest rates, historic debt levels, and extreme monetary experimentation, gold is needed as never before. Will gold recover? Mid-cycle correction, the type that all long-term moves have. Until now, throughout this bull market, gold has not had a year-to-year decline, so a correction was overdue. Moreover, though a peak-to-trough drop of 33% is painful, there have been two previous pullbacks of more than 20% (29% in 2008). On each previous occasion, gold was back at new highs within 18 months. During the great 1970s bull market, gold dropped 43% in 1975-1976, immediately before moving eightfold throughout the rest of the decade; and it had two other drops of 28% and 29%, yet bounced back. And it remains above trend lines going back to the onset of the bull market. So, contrary to the assertions of some analysts, based on price action, this bull market is by no means over. There are many reasons to be positive on gold, and to think that the decline is near an end (if Friday morning’s drop under $1,200 and "inside reversal" was not the bottom). We are not suggesting that gold will promptly bounce back to new highs. But we are suggesting that the conditions are right for a recovery. • Physical demand for gold remains strong (as was evidenced after the mid-April plunge). • Central banks continue to buy gold (with Russia and two ex-Soviet republics buying in April). • Sentiment is extremely weak (a good contrarian indicator). • There has been no increase in supply. • Global short-term real interest rates remain negative, a positive indicator.