Two Short-Term Scenarios For Gold Market
Jeff Nielson
July 4, 2009
At the beginning of May, the usual chorus began that gold was about to have its annual spring sell-off. Those voices included not only the anti-gold cabal, but also a number of commentators inside the sector.
The prevailing "wisdom" was that since gold always sells off in the Spring that it must do so again. As is usually the case in the market, there was no actual analysis of why gold tends to sell-off in the spring - and if those conditions were present this year.
There are typically two reasons which work in unison to generate a pull-back in the price of gold - from May through the end of August. Obviously, one of the bases for a pull-back is that gold typically has a large rally in the Spring, the culmination of the strong season for gold: from October through March. This year, there was no significant rally from January through March.
The second fundamental factor which typically helps to create weakness in the gold market is a large decline in India gold imports - as their "wedding season" draws to a close, which is a cultural driver for gold purchases. This year, there have only been minimal imports from India (see "Is India now irrelevant to the gold market?").
Thus, there were no fundamental factors acting to push the price of gold lower. Observing this fact, I refused to sell any of my own positions. Yes, there is general weakness in the market over the summer months, and (even now) a sell-off cannot be ruled out. However, my own analysis was that risk/reward clearly favoured holding onto precious metals positions.
None of the fundamentals which have pushed gold above $1000 have changed, other than to become even stronger. The U.S. housing sector is still plummeting downward, with no "bottom" even possible for many years (see "The Distressing news about Distressed U.S. properties").
The U.S. labour market continues to jettison jobs at the greatest rate in U.S. history (see "U.S. economy to lose 20 MILLION jobs this year"). Monthly U.S. jobs reports have gone from gross exaggerations to complete fiction. The weekly lay-off numbers cannot be contradicted. The U.S. economy is losing roughly 2 million jobs per month - not the absurd figure of 460,000 reported by the media-parrots today.
Meanwhile, the U.S. consumer sector, responsible for over ¾ of U.S. GDP, is terminally ill, and facing an entire generation of contraction and retrenchment (see "The Death of the U.S. Consumer Economy"). This total meltdown of the U.S. economy is creating a multitude of fiscal nightmares - at all levels of government - with revenues shrinking exponentially, while spending requirements soar.
This is leading to a series of "official" multi-trillion dollar deficits for the U.S. government - a follow-up to years of unofficial, multi-trillion dollar deficits (as demonstrated with the Treasury Department's once-a-year calculation of U.S. deficits, using GAAP accounting).
As the U.S. government attempts to dump trillions of dollars of U.S. Treasuries onto the market to fund these massive deficits, we are already seeing the inevitable consequences: soaring U.S. interest rates, combined with a new plunge in the U.S. dollar. The result of this scenario is nothing less than U.S. economic Armageddon (see "Rising U.S. interest rates signal hyperinflationary depression").
The U.S. economy is destined for the worst of both worlds: an asset "depression" combined with soaring prices for necessary consumer goods like food, clothing and energy. However, for the rest of the world, the U.S.-driven fiscal insanity has caused governments to pump additional trillions of dollars of "liquidity" into global markets.
As those (stronger) global economies begin to rebound, the combination of rising demand and severe currency-dilution mean another round of skyrocketing commodity prices. Up until now, we have only seen the "dilution" component of this equation, however the "demand" driver has already begun with "soft" commodities - as a much smaller global harvest has global grain supplies once again tightening to an alarming level.
Thus, there are no fundamental reasons for gold (or silver) to slide lower, and countless reasons for them to resume their march to a destination many multiples above current prices. This brings us to the question: what's next?
Because of the rampant manipulation of precious metals, I am always reluctant to make short-term price predictions. At any given moment, the Manipulators can choose to deploy their dwindling "ammunition" of COMEX bullion to launch yet another (illegal) attack - through their massive short positions, which are far larger than anything ever seen in any other commodity market. Therefore, I will offer two potential scenarios for gold over the next several months.
In the first scenario, the Manipulators decide it's necessary to drive gold lower now, in anticipation of the massive move higher for gold and silver over the upcoming winter. This means the usual tactics: negative lease rates, massive bullion-dumping and supportive disinformation from the U.S. propaganda-machine.
Such propaganda would serve two purposes at the present time. As I wrote more than a month ago (see "U.S. Bond Bubble bursts - bye-bye equities rally"), the U.S. government cannot prop-up both its equity markets and its bond market to absurd valuations - and given a choice, the U.S. government will probably choose to guard the bond market.
Thus, the propagandists can resurrect the "deflation boogeyman" to both frighten people out of precious metals and into U.S. Treasuries. The key word here is "frighten", as the collapse of U.S. asset prices is (in reality) a driver for higher precious metals prices - since this asset-deflation implies nothing less than U.S. national default on its unsustainable mountain of debt.
In this scenario, gold could be pushed back somewhere close to long-term support around $750/oz. In my personal view, this is the least-likely of the two scenarios.
The other possibility is that there is simply no substantial sell-off in this sector. For the moment, this means more sideways movement in the sector. However, as July winds down, and market observers see no signs of weakness in precious metals, this bullish indicator will act to convince gold-buyers to try to do their buying before the anticipated take-off this fall, when gold moves back into seasonal strength.
Such strength will likely be supported by renewed buying from India, given that its huge, domestic demand for precious metals cannot be sustained purely through "scrap" sales over an extended period of time. However, regardless of who starts the fall buying-spree, once it begins we can expect both gold-bulls and market traders to pile onto the "long" side.
Should this scenario prevail, I would expect to see gold push above and past the $1000 barrier - perhaps once and for all - followed by a run-up to at least $1200/oz, with the real possibility of an even more substantial move. The combination of significant gold-buying by central banks, combined with reduced sales, means that the "spikes" in price will be stronger, while the manipulated pull-backs will be increasingly shallow.
Conversely, should we see a late seasonal sell-off in gold, and a retreat toward $800, or possibly a little lower, then likely the best we can expect for gold over the remainder of the year would be to re-challenge $1000, and likely push slightly higher - in anticipation of further gains in the New Year.
Neither scenario justifies exiting current, precious metals positions. Indeed, I would encourage people to engage in judicious buying with any significant dip - both bullion and the shares of quality, precious metals miners.
Given the certainty of enormous long-term gains in the precious metals sector, investors should maintain a long-term outlook. "Buy and hold" may be a dead strategy in many conventional sectors of the economy, but it is certainly a viable (and prudent) strategy for precious-metals holders - as well as in other strong, commodity-plays.
Jeff Nielson
www.bullionbullscanada.com
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