Why Gold Will Drop to $1,000 Per Ounce

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When the market fails to confirm your thesis, it’s time to step aside. You always hear traders say that they never ‘marry’ a stock. That’s because once you fall into the story, you tend to lose perspective. You seek out only opinions that confirm your thinking, tossing all other analysis out the window.

Inevitably, this behaviour leads to ruin.

Even if you aren’t a trader, there’s still merit in adopting this maxim. It doesn’t mean you have to drop all of the conviction from your investment strategy. Just know that it’s impossible to tame the market. If you try to fight it at key turning points, there’s a good chance you’ll get burned.

In December 2012, there was a new record in gold holdings by popular exchange-traded funds. The spot price hovered around $1,700. The 12-year golden bull appeared alive and well.

That’s where the trouble started.

At this point, gold had become too tradable with the invention of ETFs. They offered investors exposure to the physical metal. With ETFs, momentum traders could easily gain exposure to physical gold and hop right off if they didn’t like the ride anymore.

One of the market’s inconvenient truths is that one wave of selling can inspire countless other investors to run and hide. The same herd mentality that pushes prices skyward can also send them crashing down. That’s true of anything you trade on an open market – even gold.

With that in mind, early last February, I made the following observation in The Rude Awakening as speculators exited gold:

Gold’s mojo has vanished.

And if stocks have any say in the matter, it isn’t coming back anytime soon.

I love my charts. But I don’t need a picture to show you what’s going on here…

By now, you know the trends. In the 1990s, gold was stagnant while stocks enjoyed an extended bull run. As stocks started to fall out of favor in the early 2000s, gold’s massive rally began.

Right now, another shift is brewing. The tide is turning in favor of equities.

That day, February 4, gold was sitting at $1,667. A week later, we looked at the charts and called $1,550. Within the next two months, it dipped below $1,550…ultimately crashing to $1,330 by April 15.

$1,550,‘ we wrote that day, ‘was enthusiastically bought every time gold dipped since its 2011 top. When this critical support area broke, it was lights out. Sellers are now in control. You must accept the fact that gold has entered a bear market.

Come June 11, with gold at $1,374, I drew the new support level at $1,350. If the price crossed that line, I figured a swift drop to a range of $1,200-1,250 was reasonable. It only took another nine days for the Midas metal to break below $1,350 and sink to its year low – $1,178.

At that point, I expected the metal to continue its downtrend, ultimately landing somewhere between $1,100-1,000. I still think that today. Where did I get $1,000 from, you ask? Well, $1,000 seems like a reasonable long-term floor. At that price, gold will have completely retraced its 2010-2011 push toward $2,000.

a
click to enlarge

I added the long-term moving average to this chart to give you a smooth look at gold’s big, secular trend. Once price fell below this mark for the first time in 11 years, it became apparent that the massive uptrend was in trouble.

Now, you might be thinking this is a chance to buck the herd and be a contrarian and think, Gold’s dropping…people are selling…I should buy.

But it’s important to remember that the herd is usually wrong – at market turning points. Following the herd for the meat of a big move like the surge in stocks in the 1980s and 1990s or gold’s roaring bull market in the 2000s was the correct move. But knowing when to jump on board (and when to head for the hills) is the tricky part.

That’s where technical analysis comes in handy. By analysing price charts and projecting trend lines, you have the chance to spot major market turning points before the average investor catches on.

If you set aside your emotions and follow the trends, you have a shot at buying into a big move while most investors are still selling – or selling out of a winning position while the herd sits and waits for a comeback that might never arrive. Let’s use gold’s 20-year chart as a breakdown…

a
click to enlarge

Take the late 1990s, for example. Gold was still locked in a downtrend – a series of lower highs and lower lows formed a downward trend channel. Instead of buying right away, you could’ve followed the trends and waited until the downtrend was broken. That would’ve been early 2002, when gold broke out toward $300.

That marked a perfect opportunity for an aggressive buy. And even if you’re a more conservative investor, you could have waited for a rising channel to form before making a buy. That would have postponed your purchase until mid-2003, when gold finally posted a meaningful higher low near $330.

After you figured out your entry, there wasn’t much more to do. Gold’s bull market played out beautifully. The early stages (before most folks thought twice about gold) from 2002-06 gave you a tight rising channel. As gold started gaining popularity as an outperforming investment in 2006, you witnessed increased volatility, a much wider channel and even bigger gains.

Until it broke below its trend channel, my analysis gave gold the benefit of the doubt on the upside. It wasn’t until the big break that began setting up last winter that it appeared that the decade-long secular bull was finished.

This is a perfect example of not trying to call a top – but to take what the market gives you. I wasn’t super bearish gold at $1,800. It was still possible that the action we were seeing was noise or consolidation – or just a potential test of support (a necessity of a healthy bull run). It wasn’t until just below $1,600 that I shifted my thinking firmly to the bear case.

If you still doubt gold’s trajectory…take a long-term look at the Dow/gold ratio. That is, the Dow Jones industrial average priced in gold.

a
click to enlarge

The ratio touched an absurd peak of 43-to-1 when the tech bubble began to pop in 2000. It was reasonable to think the ratio was headed back to its 1932 level of 2-to-1…or the 1980s level of 1-to-1.

In reality, the Dow-gold ratio bottomed a little below 6-to-1 in late 2011. At writing, it’s back above 13-to-1. Clearly, the market didn’t give a hoot about what anyone thought was reasonable. It’s pretty obvious what happened when the Dow finally broke higher after years of decline versus gold.

It signalled the massive performance shift we wrote about in February. After more than a decade in the driver’s seat, gold is giving up ground to stocks.

If you’re still squeamish, ask yourself: Is your desire to buy gold based on reasonable analysis of market conditions? Or is it simply an emotional reaction to the sell-off?

If you’re a long-term-oriented investor, we suggest giving gold a chance to consolidate or move lower. After all, what’s the rush? When was the last time you saw any asset class permanently recovered from a violent drop the very next day? It just doesn’t work that way…

There will be snapback rallies and more downside. Expect to wait a long, long time before a suitable base forms. The gold market experienced a great boom. Naturally, people flocked to it.

Investors, traders, hedge funds and your crazy co-worker bought gold. People wanted to own it because of its performance. Now they’ve already left or are leaving. I don’t think they’ll be rushing back to buy anytime soon.

Treat gold as a safe haven if you’re going to buy now. If you jump into a gold position this year expecting explosive gains, you’ll find nothing but disappointment…

Regards,

Greg Guenther
for The Daily Reckoning Australia

Ed Note: Why Gold Will Drop to $1,000 Per Ounce originally appeared in The Daily Reckoning USA

Greg Guenthner

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14 Comments on "Why Gold Will Drop to $1,000 Per Ounce"

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John Z
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Really you might as well go to the casino and play all your hard earned cash there, at this present moment it’s just as good investment strategy as any .

Jimmy
Guest

Gold Isn’t an investment, it’s insurance.

Justin King
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The Money Bubble : the new book by James Turk will clarify gold for you.

truth and integrity
Guest
Never heard or saw your comment of february 2013. This however was 22 months late as the technical analysis you provide is based on high price and that was august 2011 5 months after gold stocks and the HUI had starting retreat, having never reached a raging bull market! You also overlook the fact that money printing has been around the 9-10% mark for 20 to 40 years and gold has not kept pace with this. ETF’s are not physical and when the derivatives enter panic stations none of the above analysis is relevant because gold is wealth and money… Read more »
Whiplash
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Jimmy say’s; “Gold Isn’t an investment, it’s insurance.” I say it can be both! Who Do You Want To Believe About The Value Of Gold? Do you believe mainstream media? Or do you believe some of the wealthiest people in the investment community, central banks, and commercial banks? Marc Faber is quick to stand up to the gold bears. “We have a lot of bearish sentiment, [and] a lot of bearish commentaries about gold, but the fact is that some countries are actually accumulating gold, notably China. They will buy this year at a rate of something like 2,600 tons,… Read more »
A pensioner
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All above is cut & paste from Casey research web site 02/02/14 Bah, Goldbug! by Laurynas Vegys, research Analyst, who should at least be recognised as the originator by referring to him.

McRoy
Guest

Whoever said Gold or any precious metal isn’t an investment surely does not know or ignorant of the meaning of investing. Even planting a tree for example is an investment.

Lachlan
Guest

After gold broke above 1000 a big deal was made of the IMF selling 4T of gold. Ignoring China, Russia etc etc Turkey alone bought 13 Tonnes of gold just two months ago…and yet the prices keep going down. I wonder why?
Anyhow I own gold and I can see the system players love the stuff despite their propaganda to the contrary.

Mark Lorton
Guest
Just new to this forum but thanks Whiplash for your legnthy response l enjoyed the read. The above article doesnt work for me. You can look at all the charts and all the technical fundamentals you want, but gold is manipulated by higher powers so charts mean zilch. Gold is a hedge or insurance for me with the potential for growth once the fiat money collapses like all the other fiat currencies before it. What do people do when they lose confidence in paper money…they flock to commodities, so gold/silver should have a nice run. People can’t hide in other… Read more »
Lachlan
Guest

ooops i made a boo boo. The IMF sold about 400T not 4. Losing my memory it seems. In any event China imported over a thousand tonnes last year.

William
Guest
This article erroneously assumes that a regular supply and demand market is at play. It isn’t. Its a total sham, a grossly manipulated market. Here’s how: The Gold price is constantly crushed by the issuing of an ever increasing number of Gold ETF ‘shares’ by the likes of Goldman Sachs. During the first year of the Gold ETFs, the claim ratio on every ounce of gold held by them was 1:1. Now it is 112:1. They are basically printing gold share certificates the same way as the Fed is printing dollars. God help them if people all want their gold.… Read more »
Damien
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I am a new gold bug, only in my mid 20s and didn’t really see ‘gold’ as an investment. I’ve been taught by my folks only about property & the buy and hold mentality. I have purchased most of my gold in the last 12 months. Though I dont believe I picked the bottom of the market in anyway shape or form I am confident its better than cash in the long term, and I think the property market is in trouble. I have been looking for articles ‘against’ gold so I have both sides of the story. Id hate… Read more »
D
Guest
^ I am also in my mid 20s – run own business. Converted my savings into allocated gold. Haven’t took delivery yet – may be a good idea. It doesn’t take much to figure out that the current Australian financial system is based on nothing but shuffling mortgages. It’s horrid. There is nothing in MSM in regard to real economic/financial analysis. I can guarantee there are very few Australians that are aware of the QE program. When a job is lost – it’s always the employers fault for being too greedy. The whole mentality in the country is broken and… Read more »
SR
Guest
Interesting article however not relevant for the current economic climate. If you take into consideration what is really happening in the world today with the highest levels of debt, money printing, interest rate manipulation, gold market manipulation and overall fiat money fraud which has never been seen before, gold is one of the only real value investments left. The physical supply of gold is absolutely minimal, ask Germany who got 5 tonnes or so from the 1500 they asked from the US. Clearly shows there is massive demand for physical gold with very short supply and fiat money markets are… Read more »
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