Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
This may cause you to doubt yourself – but don’t let it
The sudden fall in the gold price has left most analysts scratching their heads.
Six weeks ago, the yellow metal was trading at US$1,325 per ounce.
And last night, it dipped down to US$1,240.
That’s an US$85 fall, or a cool 6.4% down.
We’ve seen this sort of price movement in gold before.
My message for you today is this: DO NOT FALL FOR IT.
Now that gold has broken through the key psychological level of US$1,250, you can probably expect it to fall further.
This will cause some investors to doubt their decisions.
But I don’t believe it will last. In fact, it could herald a sharper reversal to the upside, which could take everyone by surprise.
One argument for the falling gold price is a strong US dollar, but that doesn’t quite fit the story.
The US Dollar Index [DXY] is one way to measure the value of the greenback on a daily basis. The DXY compares the greenback to six different major global currencies.
Since the middle of May, the DXY has moved from 93.68 to 94.87 a grand total rise of 1.27%.
Sure, that’s up. But a 1% gain hardly supports the idea that the US dollar is ‘surging’.
The follow-up to this, to explain gold’s sudden and drastic drop, is falling Asian demand.
While private demand for gold has fallen among Asian customers, this is cyclical.
Goldsilver.com did some number crunching, using data all the way back to 1975.
They found that April through to June is historically gold’s worst-performing quarter. In other words, gold often falls around this time. And these price falls often give investors a good entry price into the precious metals.
Meaning the price falls and the drop in demand are normal, seasonal factors for gold.
All old-timey gold buyers know this.
The problem is, a weak US dollar and massive fall in the gold price don’t make sense, given the bigger factors in play across the world.
Geopolitical tensions have been running hot all year.
There’s the US-China trade war, which has now spread to Europe and Canada. Both nations are whacking tariffs on all sorts of products in retaliation. Canada is applying high import duties to tomato sauce and dishwasher detergent, of all things.
In the background of all this, there’s the eurozone keeping the cash rate at 0.25% until at least mid-2019. And the Fed raises rates twice again this year. Two key economies in the world with different interest rate policies. One with low rates to stimulate the economy and the other raising rates on the back of inflationary fears.
Both interest rate policies can be supportive of the gold price, more so as each nation is trying to engineer inflationary growth, just at different speeds.
However, simply summing up the gold price fall based on the US dollar and rates is a little too neat. Most analysts are using this as their go-to answer, rather than admitting they’re just as baffled as the rest of the market.
All the while, there’s massive bullion buys happening in the marketplace.
Between January and April this year, Russia bought 71.5 tonnes of gold. The May-June price dip means it’ll just buy more, too. CNBC reported that Russia spent most of June swapping US Treasuries for physical bullion.
Not only that, but a Swiss government pension fund bought a whopping AU$954 million in gold bullion a couple of weeks ago. Not gold-backed ETFs but actual, solid gold. Rumour has it they will be choosing to store it in a local vault in Switzerland.
Pension funds rarely move into illiquid assets like gold bullion.
There are enormous gold buys happening in the physical market. This is a very bullish signal for gold.
The gold price correction
What if this gold price fall is only a dip?
You should think of the move we are seeing in gold right now as a gold bear market trap.
That is, a false signal that suckers people into thinking the bull run is over.
Some people will sell their gold. Others may even short it.
In my view, they will be making a BIG mistake.
You see, we’ve seen all this sort of price action before.
Towards the end of 2003, the gold price rallied hard, peaking at US$426 per ounce. Come May 2004, the gold price had crashed 11% to US$375 per ounce. There was a sudden eight-week selloff, catching institutional traders off guard at the time.
For technical analysts looking over the charts in 2004, the price movements broke all the traditional support price lines.
Much like now, the market was baffled at the sudden fall.
However, it didn’t last long.
By June 2004, the fall was over, and the gold rally began once more. Spot gold finished the year at US$450 per ounce.
History tells us it was just a price correction.
A price correction is when an asset price drops 10% over a small window.
And that’s happening again now.
After analysing the gold market for years, I’ve discovered there are distinct stages to a gold bull market. A gold price correction is a key part of one of those stages.
Initially, I thought a gold price correction was perhaps a year away. But with gold breaking through the US$1,250 level overnight, I anticipate further falls in the spot price.
So far, the price of gold is down 6.4% per ounce. For a full 10% price correction, from the May high of US$1,325, it means the price of gold may tumble another $50-60 per ounce all the way down to US$1,190-80 levels.
This is all part of the stages that gold moves through in a bull market. It’s just doing so at a much more rapid pace than I’ve witnessed before.
Don’t fear this move though. Once this happens, I can show you exactly what will come next.