Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

What’s Wrong With Gold?

Commodities / Gold and Silver 2012 Jun 09, 2012 - 04:04 AM GMT

By: Sy_Harding

Commodities

While the stock market has been a loser on a buy and hold basis over the last 12 years (the S&P 500 is still 14% below its peak in 1999), gold surged up 625% over the same period, from $255 an ounce in 1999 to its recent high of $1,850 in March. As with each of its previous record highs there was much excitement and widespread forecasts of $2,500 gold by year end, $5,000 gold in the not too distant future.

But this time instead of still higher highs, gold has dropped $300 an ounce.


What’s wrong?

The driving forces that were driving it higher have gone away, at least for a while.

For instance, gold is the historical hedge against rising inflation, and the theory has been that the global easy money policies of recent years couldn’t help but create an inflationary spiral. But it hasn’t happened. Inflation in the U.S., the world’s largest economy, remains tame at around 2%. Inflation did pick up in other regions over the last two years, notably China and India, which helped extend gold’s bull market. But those countries fought back aggressively against inflation with interest rate hikes and other tightening measures that brought their inflation fears under control. The concerns now are that they went too far and have slowed the inflationary pressures of their strong economies too much, and now face serious deflationary economic slowdowns.

Perhaps surprisingly, gold has also not been perceived as a safe haven in the current time of uncertainty as has often been its history. With the return of the eurozone crisis over the last three months, gold has actually declined, and the perceived safe havens seem to be the U.S. dollar and Treasury bonds.  

Demand for gold also depends to a significant degree on the jewelry trade. According to Thomson Reuters and the World Gold Council, over the last five years 12% of gold demand was for use in the manufacture of tech products, 33% from investors, and 55% for jewelry.

And that important demand from jewelry producers is taking a hit. The World Gold Council reports that jewelry market demand for gold fell 2.7% last year, but was more than offset by investor and public buying. Jewelry demand fell 6% year-over-year in the 1st quarter this year. But will investors and the public continue to offset that worsening demand? The All India Gems & Jewelry Federation reports that gold consumers in India, the world’s largest importer of gold, are now selling gold “aggressively”.

Anecdotally, the stories over the last two years have been about public demand for gold being so high that ATM-like machines dispensing gold coins and bars were becoming a growth industry. However, over the last few months, with people strapped for cash in the newly stumbling global economy, the stories are of people flooding jewelry stores, street-side gold ‘dealers’, and pawn shops, looking to sell gold coins and jewelry items to raise cash.

Meanwhile, there are two basic types of gold; that which is above ground and in circulation, and that which is still in the ground owned by gold mining companies.

An interesting phenomenon of the last two years has been the divergence between the price of gold bullion and the stocks of gold mining companies. Mining company stocks normally rise and fall in tandem with the price of the product they produce, the bullion, and the un-mined reserves of that product they still have in the ground.

Yet, while the price of gold bullion surged up 31% from $1,415 an ounce in December 2010 to its high of $1,850 in March, the gold mining stocks, as measured by the XAU Index of Mining Stocks, plunged 38% over the same period.

Traders and a number of large hedge funds bet heavily on gold mining stocks over the last year, on expectation that the divergence could not last and the mining stocks would rally sharply to catch up with the spike-up in gold prices. But the mining stocks continued to decline. It’s still a popular theory that the mining stocks will eventually have to rise to match the increased price of bullion.

Apparently not being considered is that perhaps the mining stocks, not the bullion, have the value picture right, and the divergence will be resolved instead by the price of gold dropping down significantly to return the relationship between bullion and the gold stocks to normal. That’s not a prediction, but is certainly a possibility to consider. My technical indicators remain on a sell signal for gold and I will simply stand aside until they reverse to a buy signal again.

Meanwhile, gold has been very volatile as it has declined from its March high, short-term traders repeatedly jumping in to try to catch the bottom, creating brief rallies. But brief demand from short-term traders is not the type of demand that gold needs for a sustainable rally that would put it back in its previous bull market.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2012 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules