Hi-ya, snap, biff, bang. Cop that, everybody. In US dollar terms, gold is dropping like a stone.
Last week, in our subscriber-only Scoops Lane update, Slipstream Trader Murray Dawes commented that, ‘Below US$1,645 I think gold is at risk of having a sharp fall to the low of the long term range at US$1,590.’
Since then, it’s broken even lower.
Over at The Denning Report, Dan thinks the potential low could be US$1,400. That’s his threshold for stepping in as a buyer.
A fall from gold’s high of US$1900 to US$1400 would be a drop of 26%.
It’s the task of today’s Money Weekend to explore if the gold bull market is over…
The Way Markets Work
If you caught last week’s Money Weekend you’ll know we talked about legendary investor Jim Rogers.
One thing he has consistently pointed out is a historical anomaly in the recent gold market: for twelve years (in US dollar terms), gold has not had a down year. Every year the price has been higher than the year before.
He’s studied a lot of markets. According to him, gold’s 12 year run is very, very unusual. Normally, you get periodic price declines.
If you’re a gold bull, it probably sounds strange to think gold would go down now. Nothing has really changed about the long-term case for gold.
But the price action says otherwise. And one thing we’ve learnt from Rogers is that’s the way markets work. It’s not unusual for an asset class to have a large correction during a bull market. We’re not talking about the small ups and downs of daily price movements. We’re talking drops in the range of 30-50%.
One example is gold in its last bull market.
During the 1970′s gold ran from $US35 an ounce to US$200. It then fell 50% over the next two years. Anyone who sold at the bottom would have watched it then go back up eight times to US$850.
The current bull market in oil includes the monster drop from US$150 a barrel in 2007 to under $US40 in 2008. Oil is now trading around US$100 again.
The bull market in US stocks from 1982 to 2000 included the Wall Street crash, when the Dow fell over 20% in one day.
And, of course, iron ore fell from its high in 2011 of US$187 to under US$100 by September 2012. It’s since recovered to trade over US$150. (Of course, if you’re following the China bull and bear debate here in the office, you’ll know that editors Alex and Greg obviously differ on how long it’ll stay up there.)
That’s all nice in theory, but not encouraging in the short term. But if you can view this as a normal correction in a long term bull market, the editors here think gold bullion presents a wonderful opportunity to step in and buy on a dip.
But is it a dip? As you know, there are markets that dip and rebound and those that dip and keep going down! Well, no one can ever be 100% certain of anything. But if you ask our resource expert, Dr. Alex Cowie of Diggers & Drillers, not only is a major move to the upside brewing in gold, but it could be sooner rather than later.
An Overdue Rally for Gold?
The basic case for gold is the same. Demand – from China, India, central banks, investors and the jewellery trade – is still on the rise. The outlook for major new sources of supply is still pretty weak considering the run gold has enjoyed.
Gold miners have had a tough two years in the market. The gold price has been consolidating. Their costs have risen, compressing their margins. Explorers and developers are finding it hard to raise money to fund their operations.
This in a time when high ore grades are harder to find. The biggest gold producing countries, Australia, South Africa and the US, produce less than they did in 2003, according to the CRB Commodity Yearbook. There’s one exception to that: China. But that gold stays in China.
That’s the big picture. But we invest in the here and now. Alex told Diggers & Drillers readers this week that the price action in gold is a bit misleading. The forward and futures markets hold the clues to the next move in gold. Why?
Alex wrote:
‘The most powerful signal in my eyes is the Gold Forward Offered rate (GOFO).‘The GOFO is another measure of market liquidity, and is set to hit new multiyear lows. Over the last five years, the one-month GOFO has been a consistent warning sign of an imminent major move in gold. And importantly, these moves have been associated with outperformance in gold equities. And when GOFO turns back up, it’s the sound of the trigger being pulled to start the rally.’
A Gold Rally Coming?
You can see what he means in the chart. If Alex is right, gold will rebound and the higher price should rerate gold stocks.
The reality is trying to pick the exact bottom is impossible. And there’s no doubt it’ll take some confidence to hold or add to your position while the selling pressure persists.
In the meantime, we think it helps to remember this old investing adage:
‘Nothing goes up in a straight line.’
Callum Newman
Editor, Money Weekend
PS. Don’t forget if you want to keep track of the latest things we’re reading and brief commentary on events that happen through the day, check out our Google+ page here or Kris Sayce’s here.
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