Gold’s woes won’t last – we’re heading back to $1,800

Ugh.

Monday was another one of ‘those days’. Gold was hit for $40 – over 2%.

The bulk of the losses (as they always seem to) came during New York trading. The hard selling began quite gently – but punctually – shortly before 10am, with gold just below $1,700. It got aggressive after the mid-morning latte at about 11.20am and, in just over two hours, the price was taken from about $1,693 to $1,660.

Then it was time for a pastrami sandwich.

‘Those days’ are becoming a little too frequent for my liking. We’ve had about five of them since the beginning of November. Somebody doesn’t like gold …

Something’s got to give

I am surprised to see gold under so much selling pressure. I had expected the opposite.

I’m not entirely sure what’s driving it. Perhaps there is some unwinding of the long-gold/short-euro trade. This is where people bet that gold will rise against the euro. This trade is no longer tempting given the relative calm that has fallen on the area – for now.

Whatever the reason, this selling pressure has not come at a good time, technically at least. We are now in an intermediate-term downtrend.

I’d like to share a chart with you that I have been working off in recent weeks. It shows gold since 2008. Let me try and explain the various things I have drawn on it.

Gold price chart since 2008

(Click on the chart for a larger version)

Here’s the close-up view:

Gold price chart since 2008 closeup

(Click on the chart for a larger version

Underneath the price, I have drawn a red trend line off gold’s 2008 lows. Gold is sitting just on the trend line now, ‘on support’. I would not like to see this trend line breached, as that would indicate that a near four-year trend is broken.

The green line is the 144-day moving average – the average price of the previous 144 days. For some reason this worked beautifully in the 2009-11 period catching gold’s lows, as indicated by the lilac arrows. Since late 2011, it has stopped working. Gold is sitting just below it by a few dollars now. It’s a convenient place to find support.

Of late, gold has shown a tendency to make ‘spike lows’. I have pointed these out these with the red circles. I am hoping this week’s action is typical of this. If it is, we should see a rebound as soon as today or tomorrow.

The blue and amber areas indicate the range which has bound gold over the last 15 months, as it has gone through this consolidation phase. Three times it has tried to get above $1,800 – the blue area. Three times it has failed. Three times it has tried to test $1,520 – the amber area. Three times it has held.  Sooner or later, one of the two has to give.

I would say the chances are fairly high for a reversal here and now. If gold continues this downward trend, there should be some support around $1,600. Who knows, we may have to re-test $1,520 again – trends do build momentum, particularly given that so much trading is now by computer programme – but I’m not betting on it. And I’m certainly not selling any of my gold.

Why I expect gold to hit $1,800 before $1,520

By the way, if any reader fancies a little bet: I’m happy to wager a silver ounce with the first reader who feels so inclined that $1,800 is breached before $1,520 – do it via twitter, is best I guess. My handle is @dominicfrisby.

For gold to go through $1,520, we’re either going to need the world’s monetary and financial woes to be suddenly fixed (nah); or there really is a conspiracy to impoverish gold investors (hmm); or there’s some kind of 2008 liquidity event (doubt it); or the end of the world, as supposed to have been predicted by the Mayans, does actually start to unfold (gulp).

Five times since early November large amount of gold have been dumped on the market. This is not the action of a disciplined seller trying to get the highest price for his or her gold.

Rather, it is the action of, off the top of my head, somebody who has just had a margin call. Or maybe somebody who is trying to get the price down, so he/she can buy and go long, or cover their shorts.

Finally, I have taken Dimitri Speck’s seasonal gold pattern and underneath I have put gold in 2012. Speck’s seasonal charts (seasonalcharts.de), using the data from the last 30 years, show gold’s seasonal patterns – ie, what gold is likely to do at any given time. 

Charts of gold's seasonal patterns

(Click on the chart for a larger version)

You can see how from January to March, gold went the seasonal script. In April and May it deviated – this year it fell when it normally rises. But then, from the June slump and rally right through to the November rally and the early December correction, it got alarmingly back on track. It’s only in the last week or so it’s gone off-script again.

We’re still in consolidation mode, folks, after that 2008-2011 run from $700 to $1,920. It looks like we stay in consolidation mode for a while longer, with patience and resolve continuing to be tested.

As a final word, if the world does end tomorrow, may I say what a pleasure it has been writing these Money Mornings, and what a terrific bunch of readers you are. 

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

Our recommended articles for today

A shortcut to finding great stocks in Asia

Asia is home to some fabulously wealthy business tycoons who are investing heavily in the region. And keeping a close eye on what they’re buying can open up big opportunities for investors, says Lars Henriksson.

Why you should always hold some cash

Conventional wisdom dictates you should have all of your money invested all of the time. But keeping some cash back is often the wisest investment decision you can make. Phil Oakley explains why.

34 Responses

  1. 20/12/2012, David wrote

    Dominic, the reason the 144 day ma does not work anymore is because
    of the nature of a moving average. It is a trend following system, and as
    you mentioned, gold has been in a consolidation for 18 months.

  2. 20/12/2012, Christl wrote

    Thanks for keeping me supplied with all your hard work. I just love your articles as I have become a bit of a gold bug. I wish you all a good rest over the festive season and a healthy and wealthy 2013! And please keep those articles coming!

  3. 20/12/2012, Alan wrote

    I really want it to take a hammering and so create a good buying opportunity. All it needs is the perception that the world’s economic woes are over. Reality is a different matter.

  4. 20/12/2012, Peter wrote

    Hi Dominic – if the world does end today I’d rather be clutching gold than paper….whichever way I’m headed !! Best wishes to all and many thanks.

  5. 20/12/2012, Tibbs wrote

    Thank you Dominic for your lively comments and writing style.Even when I’m having a bad day two people always perk me up – yourself and Matt!
    Have a great Christmas and successful 2013.

  6. 20/12/2012, Leslie wrote

    Hi Dominic -
    Do I detect the influence of the arcane writings of Jim Sinclair here? Did you notice that Martin Armstrong was recently expelled from the “Circle of Trust”? I guess he would be the one to take your bet.

  7. 20/12/2012, IJ wrote

    @ 3. Be careful what you wish for. Gold risks being absolutely crushed in what could be an era of structural disinflation. Central bank easing is on full throttle, beyond any goldbug’s wildest dreams, and look at the recent price action.

  8. 20/12/2012, Nick wrote

    Hi DF

    you say “I’m not entirely sure what’s driving it .”

    Well one thing’s a certainty……. it ain’t an honest market

    The ‘market’ driving it is the same one that drove (drives) LIBOR.

  9. 20/12/2012, turbo grandad wrote

    Hi, just hoping that the conventional wisdom gold hoarding stands, meanwhile knees are knocking. Is that someone the Fed with its gold reserves manipulating the gold market to create an illusion that currency is stable ?. Who knows anything can happen these days, thats the only conventional wisdom I could proffer.

  10. 20/12/2012, Chris wrote

    Nobody has mentioned the seemingly divergence of Stocks away from Gold. As John Burford mentioned in his recent ‘Moneyweek Trader’ report as the waves of liquidity via the central banks hits asset markets, alot of this cash has been thrown into the Emerging Markets in Asia and also alot of bullishness in South America and even the US markets. At the same time traders have been selling their gold positions as the downtrend continues. I agree with IJ; be careful what you wish for as I sense a panic in the Gold market brewing. Anybody who studies Technical Analysis will tell you (whether you are bias or not) that the charts are pointing to much lower prices and the deviation away from stocks is getting stronger and stronger. P.s. I hold Gold as a hedge against a collapse of the system as we know it, not against Inflation. Stocks and Cash are going to be the only beneficiaries of inflation, as rising prices and interest rates take hold; NOT GOLD.

  11. 20/12/2012, Lumino wrote

    If those tea leaves, usually so reliable, are not working any more there must be a conspiracy! A conspiracy I tell you!

  12. 20/12/2012, L Townley wrote

    reading an old article (moneyweek – i think), just before the bull run that followed the consolidation of from 2008, there was strong buying of physical gold at the same time the general market dropped. there seems to be record sales of gold coins in recent months, i’m curious to see if the market follows the same pattern. If there is a manipulation/suppression of the gold price at play, the rebound will only be stronger. someone described the market as, short term a voting machine, long term a weighing machine.

  13. 20/12/2012, Andy wrote

    #10 “Stocks and Cash are going to be the only beneficiaries of inflation, as rising prices and interest rates take hold; NOT GOLD.”

    I’m baffled, how can cash (paper money) be a beneficiary in an inflationary environment???

    “as the waves of liquidity via the central banks hits asset markets, alot of this cash has been thrown into the Emerging Markets in Asia and also alot of bullishness in South America and even the US markets.”

    Causing inflation in ‘hard assets’. If nothing much in the way of growth comes out the other side, what then? What is plan C, or D?

  14. 20/12/2012, Gordon Freeman wrote

    How utterly predictable! WHY has gold fallen NOW? Simply because the commercials were massively positioned for it. Once their shorts have been executed and they have shaken out the scaredy cats, it will take the downward pressure off and it will probably rebound (maybe in the New Year same as last year). Also I suspect John Paulson is liquidating GLD holdings at the end of the year, plus the fiscal cliff nonsense triggering redemptions. Will be interesting to see how low this goes.

  15. 20/12/2012, ReaderMax wrote

    Healthy debate,and I do appreciate the work, but the various attempted justifications seem to be proving the case that in fact gold is no investment at all. It’s relative inertness and ability to just sit there is interesting, but of very little use. Worse than houses, which at least are a shelter. Nearly all busts are the result of property bubbles, th bubble being the “above true value” part? So where’s the actual value in gold? It doesn’t even keep you dry. I can see it has some properties of insurance, fine, but please don’t think it is a true investment, i.e. something with an at least constant true value, plus a yield from its function, like a farm, an energy company or an infrastructure fund.

  16. 20/12/2012, THE COMMON MAN wrote

    I agree with Max.Its just a little bit strange how moneyweek keeps
    pushing gold and gold miners,which you cant do anything with,while continually prophesising doom and gloom for housing which after food is an essential.Have you tried renting out your gold bars?

  17. 20/12/2012, Aff wrote

    Dominic I’m not going to take your bet, I wouldn’t sell any either.

    Reader Max and Commonman, you sould like good dependable disciples of Warren Buffet but you forgot to also say ‘you can’t eat it’. Good luck to you both and god bless, your comments tell me we’re still no where near a bubble however.

    Gold’s best quality is that it just sits there forever, eternally, not producing yields, not inflating or deflating, not tarnishing not being consumed. why do you think the market always has and always will choose it to be our best money?

  18. 21/12/2012, Andrew Buchanan wrote

    The US is getting away with massive money printing in part because most of the ‘developed’ economies are doing likewise. Paper money (in which sovereign debts are denominated) is being devalued on an unprecedented global scale but most developed / indebted economy currency pairs are moving in tandem so the devaluation of the dollar is not as evident as it would be otherwise. Gold currency on the other hand cannot be printed and, if left to float free of manipulation, would serve as a clear illustration that the mighty dollar has no clothes – with the potential of causing panic. My conjecture is that the Fed is ‘lending’ gold to compliant organisations to sell short, in volume, and at strategic times, to suppress the price in order to disguise the real weakness of the dollar. A dangerous strategy, yes, but do the gold loans ever really need to be repaid? Attempts by US politicians to audit the Federal Reserve’s gold stocks have been successfully rebuffed.

  19. 21/12/2012, Clive wrote

    Can anyone (regardless of whether you’re with/against the “gold is the only real money” argument) name a comparison of investing in gold vs investing in other assets (e.g. equities) over a long period, say 20 years.

    I’d be interested to see the results of investing a monthly amount into each over a long period. I know banks do such studies for shares vs cash, but have no idea if anybody has done a gold vs equity study.

  20. 21/12/2012, Ian wrote

    All I hear are vested people harping on about this time next year Rodney, Gold will be $3000 etc etc , but there is also every chance it will drop like a stone, if you can’t afford to lose it, then Gold is defo not for you .

  21. 21/12/2012, Charlie Aitken wrote

    Hi Dominic

    Funny enough “Somethings Gotta Give” is the title of my final blog of 2012 http://investmentimer.wordpress.com/ about physical and the mines disparity…hold onto your hats as we could be going a lot lower than $1520….good luck with the book and Debt Bomb was great

  22. 21/12/2012, Charlie Aitken wrote

    Hi Dominic

    Funny enough “Somethings Gotta Give” is the title of my final blog of 2012 http://investmentimer.wordpress.com/ about physical and the mines disparity…hold onto your hats as we could be going a lot lower than $1520….good luck with the book and Debt Bomb was great.

  23. 21/12/2012, http://twitter.com/5koFX wrote

    Articles like this should be used as contrarian indicator marking a top. When the analysts become super bullish on Gold it is time to short because the sentiment is extreme.

  24. 21/12/2012, Josiah wrote

    Ill bet You an ounce of silver Gold is gonna drop below 1520 , the reason being, we are living in a new erra, Gold will get driven down on purpose so that the higher ups can grab as much as they can, Europes economy will come crashing down and the United States economy , weeks after, the lower Gold gets the ,ore I’ll buy it

  25. 22/12/2012, smlaing wrote

    If vested interests need to move markets, It’s obvious when it would be done……..At times of technical importance. I also note that when the price goes low physical supply starts to dry up.

    Besides, the whole point of gold paper markets today and other derivatives markets is for vested interests to be able to control the prices of things they don’t own.

    I never alow the opinionated noise to affect my investing………It has served me well.

  26. 22/12/2012, D42 wrote

    I think it’s worth considering the REAL (i.e. inflation-adjusted) price of gold, in GBP – is it overvalued? Found this on the Retirment Investing Today website: http://www.retirementinvestingtoday.com/2012/08/gold-priced-in-british-pounds-gbp.html. The chart of the real gold price in GBPs shows the current real price to be twice the average from 1979, just below the 1980 peak, in real terms. Look what happened after that.

  27. 22/12/2012, Boris MacDonut wrote

    No timescale as usual from Dom. Just the certainty that values will rise by 9% before they fall by 9%. I expect Gold to be between $1500 and $1600 an ounce by next Xmas. Doesn’t mean it will be I just expect it. LastXmas I expected a J Lo DVD…..I got socks.

  28. 23/12/2012, L Townley wrote

    i think its easy to trust fiat currency over gold, as its what we’ve traded in all our lives, and therefore undervalue gold in relation to currency. i guess we have had a long period of relative financial, and political stability in britain, its not as if we’re in a third world counrty (yet). if we were on the road to a collapse of our financial system, would i be wise to hold a large part of my worth in intangible elecronic/paper promises of a system likly due a reboot; or something tangible that has been money for thousands of years? i wonder if we have more trust in our institutions than at first we might think… i love the way waxy dave camembert and George was-born-yesterday rolled out old queeny to show the world all the shiny gold in our vault, and as sharp as a tack the lady says words to the effect of – ‘shame none of its ours!’ – all thanks to the former sad sack who sold the ‘family silver’ at britains brown bottom.

  29. 23/12/2012, L Townley wrote

    PS.COMMON MAN i’ve not tried renting out my gold bars, but judging by the correlation of sharp drops in gold leasing rates, with aggressive firesales of large volumes of gold into market, i wonder if western central banks have…

  30. 23/12/2012, Grahame wrote

    I own about £30K of Gold & Silver. I don’t worry about charts that much. The reason I own it is this: Each day that goes by, the UK £ buys me less. Western Paper has had its day and it’s not real by any measure. Gold is real and limited. Long term, Gold & Silver are rising against Paper. This will continue because nothing political is going to be able to reverse the demographics of our time. Silver has double the volatility of Gold – and so gives you a rougher ride – but its really useful stuff as well – it will always climb back. These metals are good for the long term. We should buy them for THE LONG TERM.

  31. 24/12/2012, Midas wrote

    Hi Dominic – Happy Christmas.
    Any idea what happened to db ETC plc Physical Gold SGD Hedged (XGLI) today – up 49% in one session. I notice there were only 10 trades in total ( 9 sell and 1 buy). Just 339 shares exchanged hands. I managed to sell with a 46% profit. Was this due to low trading volumes or a computer glitch – or anothe reason? Puzzled but a wonderful start to Christmas!

  32. 27/12/2012, Midas wrote

    Further to my post at 31:
    On 24/12 I sold my shares in XGLI for US237 as they had risen by 49% in one day.
    On 27/12 I was called by my online stockbroker to say that the Market Maker had made an error and that the trade had to be reversed or completed at the correct price of US160.
    I argued that I had purchased the shares in good faith and that the Market Maker should accept the loss as they had made the mistake.
    I said that I would seek advice before giving permission to change the transaction which the person I was speaking to accepted. When I logged on I found that the trade had already been reversed. Where do I stand on this?

  33. 27/12/2012, JimW wrote

    32.Midas, one reason might be is if they have the phrase “E & O excepted” somewhere on there page or in there terms and conditions.

    “E & O excepted” means ‘Errors and Omissions excepted’, a way of saying any mistakes in pricing can and will be rectified regardless of who benefited.

  34. 28/12/2012, Midas wrote

    33. Thanks Jim

Commenting on this article closed

MoneyWeek magazine

Latest issue:

Magazine cover
Avoid the dinosaurs

Why smaller stocks are better bets

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Vote in the MoneyWeek Readers' Choice Awards

Vote for your favourite financial services company in the inaugural MoneyWeek Awards, and you could win a year's subscription to MoneyWeek magazine. Find out more and vote here.


Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.