If you were to make investment decisions for your portfolio based on the weight of reporting one sees in the financial news, then there’s almost no question that the gold bull market is dead and buried, and investors should sell.

This week we have seen an absolute cavalcade of negative press when it comes to the outlook for precious metals, with a series of ever more dire price predictions.

Not surprisingly, this comes off the back of yet another poor showing from the precious metal complex last week, which saw gold trade down toward the USD $1200oz mark, whilst silver was hit even harder, falling below USD $17.50oz at one point.

This weeks report will look at some of the dire predictions regarding the short-term outlook for the metal, feature some impressive charts, and most importantly, argue why we may be closer to the bottom than many think.

3 years of pain for precious metal investors.

As most people reading this piece will know, it’s been a painful 3 years for precious metal investors. Back in August and September of 2011, gold prices were trading closer to USD $2000oz, silver had been on a run which kissed its 1980 high of around USD $50oz, and even investment banks and the like were starting to warm to gold, with predictions of USD $2500oz or higher commonplace.

Since then, its been all downhill, with gold failing at the USD $1800oz hurdle three times, before crashing all the way down to the USD $1220oz level we find it today, a correction of some 35%.

Whilst many precious metal investors are confused and concerned about the state of the market, and wonder about how much further it could fall (more on this below), its worth highlighting that the last three years have actually been painful for the entire commodities complex.

The following chart, which shows the DB Powershares Commodity Index highlights this clearly, peaking in 2011, and is now off some 25% from its previous high.

This commodity weakness is particularly relevant for Australia, and Australian dollar gold investors, and as you can see below, our key export commodity, iron ore, is also in the doldrums, off over 30% for the year (chart courtesy of Macrobusiness)

Therefore, whilst the gold correction has been incredibly painful, and some excess froth no doubt did need to come out of the market back then, it has also clearly been part of a broader commodity correction.

Is this the bottom?

Speaking to a couple of senior physical traders this week, the consensus view amongst them was that we’d see another test of the USD $1180oz to USD $1200oz region, and then potentially a sharp rally.

They put the recent weakness down to the incredible strength in the USD of late, and the lack of buying interest even in the face of elevated tensions in the Ukraine and the Middle East. This is a possible scenario – and would create an epic triple bottom, which you can see on this chart here.

However, in fairness, it must be stated that the more often a market tests a certain support level, the less likely that level is to hold, and with that in mind, there’s a chance USD $1180-USD$1200oz doesn’t hold this time, and the next stop for the Midas metal is USD $1050oz or lower.

How low do we go?

Based on the articles I’ve read this week, there’s the potential for the market to go a lot lower. Some of these articles were written by people I have great respect for, whilst others were just rather weird attacks on gold itself, which one typically sees at these points in the cycle.

Lets start with the market-based articles, including this piece at the start of the week from Chris Becker, a man whose views I have a lot of time for. In his ‘trading week’ article for Macrobusiness, published a few days ago, Chris stated that the weekly chart for gold shows we’re heading to some very dangerous territory and that the monthly chart shows that “capitulation of the last remaining bulls is on the cards with $700USDoz my target in the long term on a break of support”

The whole article has some great charts in it (on the USD, Euro and other markets too), and can be viewed here.

It’s also worth pointing out that Chris has also stated that he’s concerned about being bearish gold seeing everyone else is as well.

Moving on from Chris, and behavioural macro analyst Mark Dow is also sounding bearish, publishing a piece titled “Of trends, yields, and metals”. The article can be read here in full.

In it, he discussed the move higher in shorter-term yields, which combined with low official inflation readings increases the opportunity cost of investing in hard assets, including gold.

Dow had this to say;

“My fundamental view is that commodities got overhyped and over loved over the 2004-2011 period and we’re going through a long period of mean reversion. Initially, the hype was based on emerging market economies plugging into the grid and consultants convincing slower money that it was its own asset class and a great diversifier. The second phase of the ramp came from misunderstanding QE. Now, however, we’re in the down cycle. We saw the first leg of the great commodity unwind and the second one may be upon us. The first shakeout was mostly tourist dollars getting shaken out of the gold tree. Many of the investors who bought gold as protection against QE-induced inflation were forced out over 2011-2013, as it became clear they got it wrong. The second phase, will come as higher real rates drive the wooden stake the rest of the way through, shaking out the long term money, the asset allocators and the true believers.”

Next up was Dominic Frisby, again a man whose analysis I read frequently, and whose opinions I highly respect. He wasn’t mincing words with his latest piece, stating “Gold looks absolutely awful” and “silver looks even worse”

Dominic then went on state that the fact the Silver ETF holdings are at all time highs is highly concerning (as bear market bottoms are when everyone has thrown in the towel), and also commented on the fear of gold not holding onto the USD $1180-USD $1200oz support zone the third time around.

The article can be viewed here.

Finally, there was Trader Dan, who in an article published on September 22nd which dealt with a number of commodities, stated that “there is simply no reason to buy gold at this time in the minds of Western investors” That article can be viewed here.

Are they right?

As I’ve stated – the people whose articles I’ve included above are seasoned market professionals, and aren’t ‘gold haters’ or any such thing.

Having said that, there is a good chance we are closer to a bottom now, and that now is at the very least a good time to be dollar cost averaging in more capital to the precious metal sector.

As Trader Dan actually stated in his article “One has to go way back to December 2008 to find a comparable level of reported gold holdings in the ETF. Just to remind the reader, that was the point that the markets began to respond to the very first Quantitative Easing round implemented by the Fed. Another way of saying this so that it perhaps serves to bring more force to the argument, is that nearly every single bit of gold purchased in GLD at the initial implementation of QE has been SOLD.”

Dan is absolutely right. All of the softer hands are now gone from the gold market. Those investors, who took tactical positions via ETF holdings have given up the ghost and run (potentially into an oncoming train called S&P500 correction).

The only people still in gold ETF’s were those who were accumulating pre GFC, before sub-prime, Lehmans, trillions in QE, European debt crises and Chinese hard landings filled the front pages of the Financial Times and the Economist.

That’s a sign the market is at a much healthier level today, and this is backed up given the increased levels of Asian and central bank physical demand for the yellow metal.

Secondly, looking at Mark Dow’s arguments, whilst commodities and gold have sunk in tandem over the last three years, you only need to go back to the GFC to remember that gold, and commodities do not go hand in hand performance wise, especially in times of market stress.

Commodity prices were absolutely smashed in 2008, down the better part of 25%, whilst gold actually rose (albeit marginally), in USD terms. Therefore, if the market is approaching a genuine ‘risk-off’ event, gold may well come to the fore, as it has so often in the past.

Finally, it’s also worth pointing out that gold sentiment is as low as it’s been in years, back to levels last seen in 2009, when gold prices were around the USD $800oz level.

That is captured pretty neatly in the chart below, which appeared in an article at GoldBroker.com, with the data originally coming from Nick Laird.

You can read the full article here.

Adding all this up, and whilst I’m not ruling out the chances of further weakness in the precious metal complex short-term, I do think that we’ve got a lot more upside than downside ahead in the coming years.

I also think that any major future weakness will coincide with a stock market correction, and a falling AUD, meaning AUD gold investors will hold up better than most regardless.

Finally, I’m attracted to gold even more now from a contrarian perspective, due to the following comment from Trader Dans, which I mentioned before; “there is simply no reason to buy gold at this time in the minds of Western investors”

A famous market observer once commented, “When you can think of 100 reasons to buy something, you should sell it. When you can think of 100 reasons to sell something, you should buy it” No one in the market can think of a reason to buy gold now.

For all of these reasons above – I’ll do so - continuing to average in more capital, and treat these bouts of weakness as buying opportunities.

Some broader anti-gold arguments

I couldn’t help but also comment on two other articles that came to my attention this week, which were the typical anti-gold bashing contributions one has come to expect when the metal is going through a soft patch.

The first was this contribution from the Motley Fool, who had a piece published in USA Today titled “Why Warren Buffett hates gold”. The full article can be read here.

Apparently, Buffet’s “biggest issue is the fact that gold is just so worthless. Not in the value someone is willing to pay for an ounce of it, but in its ability to create wealth. In Buffett's opinion, gold is lazy and has no place in an investor's portfolio.”

If that is true, then what is the point of holding cash in a portfolio, especially today when it pays less than the rate of inflation – and you get taxed on the paltry interest payment you receive?.

Furthermore, if this is true, Buffett must think all the major central banks and treasuries of the world are complete idiots. They are holding 30,000 tonnes of a ‘so worthless’ metal that for some obviously unexplainable reason has appreciated by some 9% per annum for over 4 decades now, and still they won’t sell in order to hold something more ‘productive’.

In fact, not only aren’t they selling – they’re buying, and will likely continue to do for many years to come.

Perhaps my favourite part of the article though was the author’s inclusion of Buffett’s famous comment that gold “gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

As the author noted, that comment was made in 1998. Gold prices averaged USD $294oz in 1998. They are over USD $1200oz today.

I guess people have differing definitions of utility, but long may Warren continue to hate the metal.

If it wasn’t enough that Warren Buffet hates gold, Cullen Roche over at Pragmatic Capitalism decided to chime in with the fact that “Warren Buffett is right to hate gold”, which you can read here.

In fairness, I quite like some of the stuff that gets published by Cullen over at Pragmatic Capitalism, but there was one point he made which I couldn’t disagree with more.

Cullen stated that; “Betting on commodities like gold is often a bearish bet against human productivity and innovation. When you buy a block of gold you are essentially buying an insurance asset whose value will increase if the value of dollars collapses or falls. In other words, you are betting directly against the ability of US workers to produce and maintain the value of the dollar.”

There is so much wrong with this. Firstly, what’s wrong with having an insurance asset? Using that logic, no one should take out Life or TPD cover or any kind of insurance, for its pretty pessimistic to think you’ll get sick, injured or otherwise.

Secondly, I didn’t begin investing in gold over a decade ago, and continue to invest in precious metals today because I am betting against US workers and their ability to produce.

What precious metal investors are betting against (or at least insuring against) is the US Federal Reserve and the US Federal Government, who between them have printed trillions of dollars out of thin air, and have racked up over $17 Trillion in debt, which they plan on adding to every year into the future.

Finally, the idea that to be pro-gold is to be anti “human productivity and innovation” is frankly laughable if you’re even a D grade history student.

Much of humanity’s most impressive progress has occurred during periods where society has operated under a ‘gold standard’ – where gold was money itself, and lay at the heart of good government, good banking and sound wealth management.

Indeed the US put man on the moon in 1969, when US Dollars were still redeemable in physical gold, so the idea that being pro-gold is to be anti human productivity, innovation or advancement isis a poorly thought out argument in our opinion.

At ABC Bullion we’re happy to debate the pro’s and con’s of investing in gold, and how it can best help an investors portfolio, looking at both the bearish and bullish factors driving prices.

To us, its actually an encouraging sign that articles like the last two I mentioned still get such airtime in more mainstream financial arenas, for we are quite certain that at the proper top of this precious metal market, not too many people are going to ‘hate gold’.

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.