I hate to say it, but a gold bull market seems a long way away

It’s turning into an ugly summer for the precious metals.

This is often the way. June, July and August tend to be when gold and silver are at their weakest (although the reverse was true last year).

There might be a potential “flip” trade on to accumulate now, with a view to exiting in the autumn. But a full-on, multi-year bull market in gold and silver? My view is we’re still a way from that.

Here’s why…

A very disappointing year for precious metals

Early in June, gold flirted with $1,300 an ounce. Last week it was making eye contact with $1,200, before closing the week at $1,230.

And, oh my goodness, silver has been behaving like the reverse of some moon-bound cryptocurrency. In early June, $18 looked to be on the cards. Then, a week ago, on Friday, it went below $14.40 at one stage. It has since rallied to $16, but, dear me, the days of $50 silver look so remote now, it’s like they never happened.

Many of us got very excited over the first six months of 2016, when precious metals and miners shot up so dramatically. It now seems this was little more than a counter-trend rally from oversold levels, not the beginning of some new bull market. The bear has resumed its grip.

I’d love to be able to declare that the bull market in gold and silver is back on. Gold and silver bull markets are wonderful things. Maybe the bull market begins tomorrow. I hope so. But I’m afraid that, depressing though it may be, I have to be honest and say I can’t see it. The conditions aren’t right.

From a technical point of view, we’re seeing range-bound, going-nowhere action. There’s no trend in place. Or if there is one, it’s down.

From a more psychological point of view, for a gold and silver bull market to take hold, we need to see precious metals at such extraordinarily low levels that they become compellingly cheap compared to other assets, as they were around the turn of the century.

Back then, an ounce of gold was 45 times cheaper than the Dow Jones index; now, the Dow is about 17 or 18 times the price of gold. Gold and silver are cheap, but they’re not that cheap.

When they get 1999 cheap, and buying comes in, then an upward trend can form. There’s no better advert for a market than a rising price. Once we have that, new narratives can take shape and the bull market self-reinforces. But we have no trend, just a gruelling range-bound dirge with a bearish bias.

We need triggers. In 2001, people turned to gold as they fled stockmarkets after the dotcom crash. Ditto post 2008. From being a forgotten asset there grew a genuine belief that the monetary system was broken and that gold was the solution.

Such beliefs may well be even more correct now than they were then. But the problem is there are fewer such believers; there is no common narrative to give such a bull market impetus. The “money-is-broken” narrative has moved over to bitcoin. The stockmarket is rising and acting as a perfectly good hedge against inflation. Why bother with gold?

Meanwhile, the perception that long-overdue, higher rates are coming, both in the UK and in the US, has taken hold. I’m not sure significantly higher rates are even possible without a monumental crash of some kind, although marginally higher rates look possible. Nevertheless, higher rates are deemed bad for gold too.

We’re miles away from a bull market in gold

Gold’s time will come again – but perhaps it needs to be altogether forgotten first, as it was in 2001.

My feeling is that we’re not near lift off. We’re not even on the runway yet. It might be that we’re not even in the airport, nor in the taxi there. In fact, to stretch the analogy one stage further, perhaps we are not still fully landed from the last cycle.

After gold’s bonanza decade in the 1970s, there followed 20 years of bear market. I hope we won’t need 20 years of bear market this time around. But I can easily envisage an eventual return to $1,050 to retest that late 2015 lows, before take off. That would only be a 15% slide from here.

Gold has a habit of making a low then re-testing it two or three years later. It did this in 1982 and then 1985; it did it in 1999 and 2001. Perhaps 2015 and 2017-8 will see another such occurrence.

All that said, in the nearer term, gold has reached extremely oversold levels, from which a might be possible to stage some kind of relief rally. The percentage of bulls is almost as low as it was in early 2016. Momentum is equally stretched. There is some historic support around the $1,200 level. And 2016 apart, June-August is often a good time to be buying.

The ratio of gold to silver has touched 80. If that can go a bit higher – we’ll be looking good for a relief rally. When gold is 85 times the price of silver that marks a point of extremity from which you often see rallies in the price of precious metals (particularly silver).

These are all reasons for a potential flip trade with a view to exiting later in the year. But a major investment in a long-term bull market? I don’t see it myself. Not yet, anyway.

I hope I’m wrong. I often am.

  • I think you are overly negative Dominic. Gold has risen by an average of 8% pa since 1971. Gold has risen by an average of 11.6% since 2000 (interestingly global money supply is up by 11.7% over this period too); gold is up 7.1% year to date. It has done what it should do.
    If you were planning for your long term (like a pension) you should be delighted by this return; that gain since 2000 (11.6%) pa equates to 470% over 17 years – while the FTSE 100 is up 6%. I accept that gold does not always behave as predicted in the short term – but it does behave as expected in the long term … and that is surely the point about gold ???
    Your impatience – forgive me for saying so – is typical in a culture of “I want it now with a cherry on top” … kind of world.

    Silver by the way has seen massive selling by the specs in the last 4 months (that is 15,500 tonnes, equivalent to 58% of annual global mine supply) to a net short position for the first time since mid 2015 – contrarians would look to this as great news – silver has absorbed the worst the specs can throw at it and is thus well positioned for a short covering rally. Things have actually rarely looked better for all precious metals.

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    • LeMonsieur

      Thanks Ross.

      I take your point about gold doing “what it should do” but to use 2000 as a starting point, though it makes sense from a time point of view, is slightly misleading in that 2000 was pretty much the bottom. If you conducted the same analysis from 1980 or from 2011 the numbers would look much worse – though they would be equally misleading as you’re going from the top.

      As for “I want it now”, I think I’ve been in the game a long time. Hard to accuse me of that …

  • John Stringer

    Thank you for the thoughts Dominic. It would be even more interesting if you mixed your technical thoughts and musings with some fundamental ones. We were told a few years ago that silver stocks were running low, that demand was vastly outstripping supply. Is this still the case? Are we now two years closer to the big squeeze? Thank you.

  • Peter Cooper

    Strong contrarian indicator, and sod’s law gold and silver are jumping today as the demise of bitcoin looks like the end for another potential rival…

    • LeMonsieur

      Bitcoin’s rallied 30% in 2 days

  • george allan bloom

    first of all you need to get your facts straight. silver did not go below 14.40, all trades were adjusted by the comex to a low of 15.54. your ignorance of the market not only invalidates your opinion, it exposes your position of likely being short the market and doing a hatchet job on price forecast, you have a good day, the COT REPORT is much more revealing to the truth than you are.

    • LeMonsieur

      I’m only going on what my charting software shows. (And I thought the number looked rather extreme). From there t project accusations of silver price manipulation onto me is delusional.

      • jay

        Dominic – if your often wrong like you say then why are you with a publication and also there is not much right advice you can give – so what are you doing here ?

        • jay

          Soroyal I menth dominic

        • LeMonsieur

          I give you my opinion in, hopefully, an interesting and entertaining way. Readers mostly enjoy reading those opinions. And you pay nothing to read them.

          It is not possible to be right about markets all the time. Not Jesse Livermore, not Warren Buffet, not Benjamin Graham was ever always right. They were all often wrong – and all were/are frank and open about their fallibilities. Any time spent trading and writing about markets teaches you that you cannot always be right. It pays to remind yourself (and others) of that simple fact and to show humility. If you are going round the internet looking for someone who is always right, I strongly urge you to think again about what you are looking for or you risk rapidly being parted from your investment capital.

          • Joe

            I agree with you 100% that it is impossible to always be right. What you are giving is simply a guesstimate based on your forecasts, knowledge and experience. I have gold and silver and intend to hold. Would you consider that a wise move?

            • LeMonsieur

              yes

              • LeMonsieur

                I do too

          • azazel

            Always enjoy reading what you think Dominic, and always with a large dose of humility. Thank you!

            • LeMonsieur

              No. Thank you!

  • Michael Bronislav

    Hi Dominic.

    I already back this topic up before about the future of Gold and other precious metals this year and i totally agree with you. They do have a not so shiny performance in general, however there are still times they’re on the bull market esp silver. Recently, gold was either finishing strong or remaining steady as they anticipate the ECB and Bank of Japan meetings on monetary policy (see Gold futures remained solid)

  • Peter Cooper

    Sort of famous last words… hot for $1,300 now…

    • Jonathan Lee

      Am sure you are aware $1300 breached
      $1400 Quite achievable within 6 months

      • Peter Cooper

        Absolutely, but then this guy’s editor is pro Brexit, all fools together…