In The Long-Term, Gold Prices Will Make Substantial Gains

The recent tight trading range in gold was broken last week to the downside as prices of the yellow metal fell by almost 3% to a 16 week low. The price of spot gold was weighed down by speculative selling on Comex as stop-loss orders were triggered, and there was also an element of book squaring ahead of month end as well as selling by commodity funds.

Last Tuesday prices fell by 2.2% – the most in a single-day this year followed by another 1% fall on Friday sending prices to their lowest level in four months as investors ploughed money into equities and bonds, ignoring any bit of negative news about economic growth. And, while violence in Ukraine persists, investor sentiment towards gold has waned somewhat after Russia’s President Vladimir Putin expressed willingness to work with the new government in Kiev.

Under normal circumstances, the release of bad Growth Domestic Product (GDP) figures would have induced some selling in equities, but almost every time there is negative news, particularly in the US the stock market moves higher.

Last week, when the latest US GDP figures were released, showing a 1% decline, one could have expected to see some selling. But, shortly after the news U.S. Federal Reserve official Jeff Lacker said that that GDP in the second quarter ‘will bounce back.’ And, equities rallied!

It seems that there is no end in sight for a top in these markets. And, as the US Fed together with other central banks manipulate the price of gold lower they push equities higher. Soon just about every individual will be long and up to their eyeballs in margin debt. And, this can only end badly. However, in the meantime, the US Fed via their bullion banks will continue to supress gold prices because it gives more substance to the dollar and the bond market. And, as prices fall countries such as China and Russia will accumulate more of the yellow metal.

The results of the recent EU parliamentary elections showed that many people are extremely discontent with a system of government that is directed from Brussels, in particular individuals in France and England. People are alert to the loss of freedom and destruction of the economic future by Brussels and are not happy with the growing socialism and totalitarianism in the region. 

Marine Le Pen's Front National swept 73 electoral departments, while President Francois Hollande's socialists were reduced to two.

She vowed to confront Europe's leaders with a stark choice at their first meeting: either to work with France for a "sortie concertee" or coordinated EMU break-up, or resist and let "financial Armageddon" run its course. "The euro ceases to exist the moment that France leaves, and that is our incredible strength. What are they going to do, send in tanks?" she said.

“The people have spoken; our people demand one type of politics: they want French politics by the French, for the French and with the French. They don’t want to be led any more from outside, to submit to laws [by outsiders]… The sovereign people have proclaimed loud and clear that they want to take back their destiny into their own hands…  We must build another Europe; a Europe of free and sovereign nations and freely decided cooperation. Tonight is a massive rejection of European Union.  If Germany has become the economic heart of Europe, through the incompetence and weakness of our leaders, then France has been and will be the political heart of Europe. What has happened in France signals what will happen in all Europe countries: the return of the nation. To all those French who voted for us, I say that the battle for the greatness of France should unite in the rediscovered love of our country…” Marine Le pen said.

With the exception of Germany, the elections were a broad repudiation of EMU austerity. The two dominant parties of the post-Franco order in Spain saw their share of the vote drop to 49% from 80% last time, with the Podemos radicals coming from nowhere four months ago to win 8% with a campaign to "stop Spain being a colony of Germany and the Troika".

The austerity coalition that has pushed the Netherlands into debt deflation crashed to 21%. The ruling enforcers of EU-IMF Troika policies fell to 31% in Greece and 28% in Portugal.

Europe's leaders are counting on recovery to rescue them, relying on the rest of the world to generate the necessary demand, but creating none itself. But, it seems that the best that can be hoped for is 1% growth in southern Europe through the decade. This will not provide enough growth to solve the high unemployment rate or the high debt levels.

Both Marine Le Pen's Front National and Nigel Farage’s UKIP parties were against the ECB policies and the EU.  This has major implications for the world economy, currencies, and also for gold.  Furthermore, you have a tremendous amount of unhappy youth in countries like Spain, Greece and Italy.  In some cases the youth are experiencing 60% unemployment.  That’s a powder keg waiting to explode.  If this situation continues, it will eventually lead to massive protests and unrest.

In the meantime, the debt keeps getting piled on top of debt. The solution by the central planners is just to print more money and throw money at the problem.  Soon the ECB may have to reduce interest rates almost to zero.  We might even see negative interest rates.  The ECB is getting desperate to do something to get the economy going and to try to stop deflationary forces from taking hold.  But so far everything they are doing is not working.

The price of gold for most of May have hovered around the $1300 level as market participants weighed tensions in Eastern Europe against an improving economic situation in the US. De-escalation in Ukraine appears to have tipped the scales. But, as gold prices broke through certain support levels, traders using the paper market on Comex were able to push prices lower.

I still maintain that gold prices will gain significantly in the long-term due to the expansionary monetary policies of the major central banks and currency debasement. And, as prices fall, I do not recommend anyone to sell their physical gold and instead to use these price dips to add to their holdings.

TECHNICAL ANALYSIS

 The price of gold broke out of the recent range between $1280/oz. and $1320/oz.  -- the next support level is $1240/oz.