Commodities | Jul 29 2010
By Greg Peel
“Having led a long campaign in favour of gold over the course of two years,” said Dennis Gartman in his latest daily newsletter, “we are on the sidelines, holding only a marginal, residual, small, tiny, unimportant 'insurance' position in the metal that we wish to have 'just in case'”.
Gartman's change of heart, at least in the near term, is driven by what he sees as a breakdown in gold's recent trend, as exhibited by this graph:
If forced to take a trading position, Gartman suggests he would go short. The “longs” now have several months of strong overhead resistance to overcome before they regain the upper hand, he suggests. That may takes weeks or months to accomplish, and Gartman would rather find other markets to play in for the time being.
I have suggested on more than once occasion in my recent Overnight Reports that gold will likely now go lower. My reasoning is twofold: (1) gold has most recently been driven up as a hedge against the euro and not the US dollar given the European crisis. Gold has rallied in US dollar terms even as the US dollar has regained ground. The dollar is now weakening again, but it is weakening because the euro is strengthening as the European crisis begins to abate. Further abatement would mean further unwinding of long gold/short euro positions.
We have now entered the “dark side of the moon” of physical gold demand, which is point (2). Jewellery accounts for some 75% or more of annual gold production and the bulk of gold jewellery is bought during Asian festivals, which are now over for the time being. Asian jewellery makers will not return to the market for material until at least September, and not at all if the gold price is too high. That leaves only speculators in the market.
We could also add in a point (3), which is that despite all the budget deficit problems in Europe, no central bank has chosen to sell gold to reduce debt. That would only serve to undermine currency value. If anything, the world's central banks are collective buyers of gold, albeit the buyers went quiet when gold moved over US$1200/oz.
Now let's look at a five-year chart:
There are two elements here to look for as well. Note (1) that every time gold spikes up, it inevitably pulls back at least US$100 and that the northern summer period is a popular time for such pullbacks. The US$300 pullback in 2008 coincided with the US dollar rally after the fall of Lehman. Note also the number of times gold bounced off the magic US$1000 mark between early 2008 and late 2009.
The biggest problem the world appears to be facing right now is not a collapse of the global economy, which would drive investors into gold, but subdued growth in Europe and the US and slowed growth in China. Deflation is now more the fear than inflation. Gold is not worth holding in a deflationary environment, and certainly not if 75% of physical demand is hibernating.
Gold has already fallen close to US$100 recently, but there is little to suggest much support yet. The 200-day moving average sits at US$1144/oz which will be an interesting testing ground. A fall below that, would suggest a trip back to the US$1000 line is not a stretch.
That's assuming no unforeseen disasters in the meantime, and assuming the Obama Administration doesn't panic ahead of the mid-term elections and start announcing new fiscal stimulus measures costing billions.