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Have We Reached the “End of a Golden Era” – Again?
In its last weekly issue in 2016, Barron’s summarized the gloomy sentiment about gold on Wall Street by saying “the yellow metal’s price is anticipated to fall in the months ahead as the expectation of stronger economic activity and still higher rates weighs on it.” The headline for this year-end survey proclaimed:
“The End of a Golden Era”
–Barron’s headline, December 26, 2016
This sounded like an instant replay of the start of 2016, when gold sentiment was equally dismal. Here are some examples of what some major banks predicted (in mid-December 2015) for gold in the year ahead.
- ABN AMRO expected gold drop to $900 in 2016, saying “A rise in U.S. Treasury yields should push gold prices towards $900 per ounce or even below in 2016” due to “investor position liquidation.”
- Bank of America Merrill Lynch said “there are still good reasons to be bearish on gold, at least in the first half of the year.” They predicted a drop to $950 gold in the first quarter of 2016.
- Citicorp said “investors may continue to reduce gold exposure and look for returns in equities and bond markets.” They predicted an average price of $995 in 2016, rising to just $1025 in 2017
- Deutsche Bank expected a fall to $980 in late 2016 and an average price of $1033 for the full year.
In fact, however, gold never traded below $1,100 per ounce (much less, $1,000) after late January, 2016.
From looking at major bank forecasts over the years, it is hard to avoid the conclusion that established banks are trend followers – predicting lower gold prices when gold is falling and predicting higher prices when it is rising. Since gold has fallen two Decembers in a row, forecasts are bearish two years in a row.
Gold’s Low in Both 2015 and 2015 Came Just After the Fed’s Rate Increase
Last week, on Thursday, January 12, 2017, gold climbed back above $1,200 per ounce on the London morning and afternoon price fixes. That was the first time traded above $1,200 since November 22. The post-January low for 2016 was set on Thursday, December 15 (at $1126.95). It came one day after the U.S. Federal Reserve raised short-term interest rates by 0.25% and indicated that they would likely make two or three more rate increases. That mid-December low for gold is eerily similar to gold’s 2015 low of $1,049.10, set on Thursday, December 17, the day after the Fed raised rates by 0.25% and promised two to four rate increases in the next year. Pardon me if I hear a faint echo in those two annual price lows.
Lost in all the gloomy commentary is the fact that gold’s 2016 December 15 low was almostt $78 higher than the 2015 low. A higher low is generally a bullish technical pattern. And despite gold’s sharp decline after the November 8 Presidential election results, gold still managed to gain 9% for the full year of 2016.
In Barron’s’ late-2016 summary, they quoted leading Wall Street authorities like Bank of America, which said in its 2017 Commodity Outlook that “Fed hikes in an environment of subdued expectations are a key head wind to gold.” Forget for a moment that gold rose strongly (+50%) the last time the Fed raised rates multiple times (2004 to 2006). No matter what history shows, until the Fed finishes raising rates, the media and the pundits will keep telling us that gold is bound to fall if short-term interest rates keep rising!
Last year, gold began the year rising rapidly, soaring 17% in the first six weeks (to February 11), while the S&P 500 fell 10%. That shocked Wall Street and caused many investors to pour into gold exchange-traded funds (ETFs). Gold ETF buying reached historical highs in the middle of 2016, but it’s important to realize that traders who jumped on gold after February 11 lost money in gold in 2016. While “buy and hold” investors enjoyed 9% gold gains in 2016, its unlikely that most gold traders made any money at all.
Gold traders tend to follow Wall Street’s lead. When Wall Street is hot on gold, investors buy GLD, the leading gold ETF. The same is true on the downside. Barron’s wrote (in their December 26 issue) that “During the week of December 8-14, 2016, gold funds experienced a $700 million outflow while equity funds attracted $21 billion, their ninth largest total ever.” That was the week before gold’s 2016 low. Etfgremds.com adds that GLD suffered $4.8 billion in outflows in the two-month late-2016 sell-off.
According to Bloomberg analyst Luzi-Ann Javier, “In December, $2.27 billion was pulled out of SPDR Gold Shares [GLD], the world’s largest exchange-traded fund backed by the metal. That was a third straight monthly loss and the biggest since May 2013. Money managers have also turned less bullish on bullion, cutting their net-long positions for a seventh straight week to the smallest since February.”
By following the trends, too many traders tend to buy near the annual highs and sell near the annual lows. That’s why we don’t rely on precise timing of the gold market. Gold is a buy-and-hold investment.
Is the January 2017 Surge Another “False Dawn”?
Part of the early January 2017 rise in precious metals is due to buying in advance of the Chinese New Year, which starts January 28 this year. Chinese investors often buy gold in advance of their Lunar New Year. David Govett, head of precious metals at brokerage firm Marex Spectron, said, “Gold seems to behaving true to January form at the moment, with physical demand picking up ahead of the Chinese Lunar New Year and investors starting to buy as the great unknown of the Trump presidency looms.”
ABN AMRO (quoted above) is once again skeptical of this January’s surge in the price of gold. Writing in their Precious Metals Watch, the Dutch bank said “Since 2000 gold prices have had a tendency to have a positive start to the year, with prices rising in January 65% of the time. The positive starts to the year happened regardless of whether the year before had ended on a positive or a negative note.” The bank adds, “We expect the outlook for gold prices for the first half of the year to remain negative.”
ICBC Standard Bank puts it more bluntly. They call the early-2017 rise a “a false dawn for gold.”
When gold surpassed $1,200 on January 12, CNBC asked two analysts about gold and they both agreed that there is strong resistance at $1,250, so traders should dump their gold positions here, above $1,200.
When most of Wall Street seems to agree, that’s often a good time to bet in the opposite direction.
We don’t know where gold is going this year – and neither does anyone else – but our bet is that gold will keep rising over the years in terms of any currency you wish to name. We see gold as an alternative to currency holdings – cash – and not as a replacement for well-chosen stocks. We like gold as a portfolio balancer and an insurance against monetary chaos. As for timing, gold is still undervalued and oversold.
In easy shorthand, whenever gold trades below the S&P 500, it is a relative buy to the stock market. By that measurement, gold was overpriced and overbought from 2009 to 2012 (see chart, below), but it was undervalued and underbought before 2008 and since 2013. As this chart shows, gold is currently around 53% (0.53) the value of the S&P 500, similar to where it was in 2007, right before the financial crisis.
The short, final drop in the chart (above) represents the surge in stocks and the gold decline since the election of Donald Trump in November. (Source: Frank Holmes, U.S. Global Investors, “Frank Talk,” January 10, 2017)
If you look at gold as a currency alternative instead of as an alternative to stocks, gold remains the strongest currency in the world. In 2016, gold rose almost 9% to the U.S. dollar, which is the strongest paper currency in the world. (As a bonus, if the U.S. dollar should consolidate, gold will likely make a stronger recovery in dollar terms.) Even though the U.S. dollar has been the strongest currency over the last century, the dollar has lost 98.3% of its purchasing power over the last century, in terms of gold.
It’s a good time to buy gold when the pundits on Wall Street are skeptical of gold – like now.