Gold prices bounced around overnight, with the final quarter of the year shaping up as critical in where the metal heads moving into 2015.

After a very disappointing Q3 return, many are predicting further downside for the precious metal sector, especially with silver, often seen as a leading indicator of where gold will head, plunging to new lows lately.

Whilst our attention has been focused on the metals market, its worth pointing out that the broader stock markets have also been doing it tough lately, with the ASX 200 off the better part of 6% in September, whilst European and US stocks started Q4 on a horrible note, off 1% (Europe), and 1.3% (US) respectively.

Indeed some indices have fared even worse lately, with the Russell 2000 index now officially in correction mode, off over 10% from its March highs, and looking like there could be further downside ahead.

As you can see from the chart below, the Russell 2000 has just breached a trend line of support that goes all the way to the 2009 cyclical bottom in equity markets.

Bottom line to all this is that whilst the outlook for gold and silver in the immediate future is a little cloudy, most of the market will be focused on equities, and what happens in that space, with even Australian ‘PermaBull’ Charlie Aitken, of Bell Potter, issuing a “correction warning” on US equities.

With that in mind, lets look at gold and silver in more detail, as well as some economic data around the world.

Gold - When Seasonality Fails

Gold investors were looking forward to Q3 this year. After a solid start to 2014, with gold one of the best performing assets in the 6 months to June, more upside was expected.

At the time, gold prices were sitting around the USD $1315oz mark, with many predicting a price in and around the USD $1400oz mark by now, based off 40 odd years of data, which highlighted that Q3 was typically a very strong quarter for the yellow metal.

Alas – it was not to be, with the surging USD Dollar (the September monthly returns of which are plotted below – chart via Macrobusiness) the primary reason behind the weakness in the yellow metal of late.

General commodity price weakness hasn’t helped either, with oil plunging, alongside agricultural commodities too. Indeed the DB Commodities Tracking Index Fund is now 13% lower than where it was 3 months ago – testament to the weakness in the entire commodities complex right now.

For gold specifically, the fall in the price in the just completed quarter was one of the worst on record, coming in at -7.49% in USD terms. Since the late 1970s, there’s only been two times where Q3 has seen a bigger correction.

One of those times, the gold price had a 3.4% bounce in Q4, whilst the other time (in 1984), a Q3 correction of -7.8% was followed up with an even more harrowing fall of over 10% in Q4 that year.

Were something like that occur, we’d see gold back in the mid $1000-$1100oz USD range, which is more or less in line with where many see the market heading in this correction. A

s we discussed last week, we’re not convinced we’re going to see a drawdown of such extremity (in part because nearly EVERYONE is expecting it), but we are only averaging money into gold and silver right now – as that seems the most prudent course of action

Gold Sentiment

With the recent weakness in the precious metal market, and the onslaught of negative press towards the sector, its not surprising that sentiment towards the precious metal market is close to all time lows.

Indeed the Hulbert Gold Newsletter Sentiment Index (HGNSI), which measures the percentage newsletter writers recommend to allocate to gold related investments, either on the long or short side, is currently sitting at -46.9%, the second worst reading in 30 years!

All this (and more) is covered in an excellent article by Pater Tenebrarum of Acting Man, which you can read here.

The only time the HGNSI was lower was in June 2013, right before gold started a circa USD $200oz rally, which if repeated, would again put gold in the USD $1400oz range we approach Christmas 2014

You can see how low HGNSI readings tend to correlate with gold price rallies in this chart here.

The bearishness in the sector is all pervasive right now, with Sentiment Traders industry group table also showing that there is literally zero percent bullishness towards the sector, just like the readings in June and December of 2013.

You all know what happened in the months following that.

Bottom line to this is that whilst there is the potential for gold to go lower in Q4, we’re already at attractive buying levels for long-term investors, and sentiment is unlikely to get much worse.

As such, a small rally into year-end shouldn’t be ruled out, and I fully expect to see gold prices comfortably higher by this time next year.

How about Silver!

If the last 3 months have been disappointing for gold investors, they’ve been even worse for those invested in the silver market. Starting the new financial year at just shy of USD $21oz, silver has shed nearly 20% of its value in the past quarter, and is currently sitting just above USD $17oz.

More importantly, silver has broken through support, as the following chart from the Daily Reckoning highlights.

Whilst this is obviously troubling a number of investors (I’ve taken more than a few calls and emails on the subject of late), in reality this is exactly the kind of behaviour you see when a market is bottoming, or very close to doing so.

It is of course exactly what happened in the 1970’s, with both silver and gold, as this article from King World News (which focuses on silver), attests too.

Whether or not we see the kind of rally we did in the late 1970’s this time around remains to be seen, but we are either at or likely close to a incredible buying opportunity in the silver market.

Long-term investors should be encouraged by this capitulation type selling, rather than frightened, as it is only in markets that are hated like this that one can find the most incredibly mid to long term money making opportunities.

A final word on the latest Economic Data

Before finishing this weeks report, it’s worth touching briefly on the last few days economic data, which should prove beyond doubt how fragile the global economy remains, despite the odd piece of encouraging news.

In Europe, we’ve seen incredibly low official inflation readings, alongside steadily and depressingly high unemployment. We also saw a range manufacturing PMI readings which were generally weak, all of which will put further pressure on the ECB to ease monetary conditions even further.

In Asia, whilst all of Australia’s focus is on China (where things continue to weaken), there was even worse news out of Japan, where industrial production figures fell, by 1.5% last month, despite expectations of a rise.

It’s been a predominantly bad news week in the USA too, with one of the only decent prints being last nights ADP employment results. Case Shiller house prices missed big time, as did the overnight ISM Manufacturing PMI, which fell a couple of points, whilst construction spending fell in August too. The Chicago PMI eased too.

Locally, we saw the latest AiG Manufacturing report, which showed a further deterioration in conditions here, whilst retail sales were incredibly weak, rising only 0.1% vs. expectations of a 0.4% rise.

Anecdotally, people in the sector are saying retail is as ‘dead’ as its been in a decade, unsurprising seeing the unemployment rate is rising, debt levels are at all time highs, and real wages are falling.

Bottom line to all this is that interest rates are heading lower, financial asset valuations will be under serious threat in the years ahead, and sensible investors will continue to protect themselves with hard assets.

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. This report was produced in conjunction with ABC Bullion NSW.