With John Hampson
Measured in US dollars, gold is into the nose of a large triangle that should break one way or the other within the next 4 weeks:
Priced in Euros, the triangle is more bullish and gold is threatening the upper boundary:
The chance of an upward resolution is supported by extreme bearishness in gold, with the Hulbert gold sentiment index averaging -3.3 over the last 4 months which has not occurred since 1991.
Gold miners bullish percent is also back to the extreme low:
Senior gold miners are also priced at levels versus their cashflow that are the same as 2008 and 2000:
Source: Gold Versus Paper / Tocqueville
Global central banks continue to be net purchasers of gold, with significant additions in H1 2012. Plus, the current round of further global rate cuts is ensuring negative real interest rates are maintained, which keeps the allure of gold for diversification.
Source: Tocqueville / World Gold Council
I reproduce below Casey’s chart showing the close relationship between food prices and gold. Since this chart was published, gold has made its 9 month triangle with a base at $1550, whilst food prices pulled back to 200 – again a similar move for the two. But based on the acceleration in soft commodity prices in the last few weeks, the food price index is predicted to make new highs in H2 2012, which should imply gold also makes new highs.
Source: Casey Research (my food price line extension and forecast)
I am long gold, and I am presenting reasons for an upward breakout. So let me balance that by highlighting reasons why gold could break down.
One is continued dollar strength and continued Euro weakness. However, the Dollar-Euro bullish trade is currently overcrowded. Extreme bearishness in the Euro, like the bearishness in gold, makes it more likely a mean reversion will occur.
Two is a big deflationary episode. If leading indicators continue to fall or sovereign debt issues escalate to new accuteness or China’s slowdown morphs into a hard landing then we would likely see no asset escape from the sell-off, as in 2008 when gold was sold off to raise cash against other greater loss making trades. However, the technicals above reveal that gold and gold miners have already experienced a washout similar to 2008 over the past 9 months.
Thirdly, if gold already made its secular peak in 2011 then bearishness in gold and miners is likely to be the new norm, with just relief rallies inbetween. In that instance, gold would make a decisive breakdown from the large triangle, followed by a series of lower highs and lower lows. For gold to lose its luster in that way, other assets would have to become relatively more desirable. Real estate is showing signs of rebirth in the West, so that’s one possibility. European stocks are largely in single p/e valuations, which is a second possibility. If money were to pour into real estate and equities then that would imply the Kondratieff Winter was over the the Spring had arrived. New secular bulls in equities and real estate would be underway.
Ultimately I can’t buy the idea that gold topped in 2011 for these reasons. One, secular asset bulls typically end in a parabolic blow off and then steep fall. Gold has instead coiled near its highs. Two, we haven’t yet reached the previous secular extremes in gold:stocks and gold:realestate ratios. Gold is relatively expensive to both, but not extreme. Three, gold demand versus supply is not projected to invert until 2014. Four, by solar cycles, gold should peak shortly after the solar maximum, which is forecast for Spring 2013. Five, by secular cycles, we should see a second and higher inflation peak 5 years after the last (2008), i.e. 2013.
Bernanke’s testimony yesterday decreased the likelihood of QE3. Whilst that may be a short term disappointment for gold, it doesn’t need it, due to global maintenance of negative real interest rates. Nevertheless, gold remains devoid of momentum and languishing bearish. What will trigger the triangle break? If nothing else, time is close to running out.