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
UK General Election 2019 BBC Exit Poll Forecast Accuracy Analysis - 12th Dec 19
Technical Analysis Update: Tadawul All Share Index (TASI) - Saudi Arabia ETF (KSA) - 12th Dec 19
Silver Miners Pinpoint the Precious Metals’ Outlook - 12th Dec 19
How Google Has Become the Worlds Biggest Travel Company - 12th Dec 19
UK Election Seats Forecasts - Tories 326, Labour 241, SNP 40, Lib Dems 17 - 12th Dec 19
UK General Election 2019 Final Seats Per Party Forecast - 12th Dec 19
What UK CPI, RPI INFLATION Forecasts for General Election Result 2019 - 11th Dec 19
Gold ETF Holdings Surge… But Do They Actually Hold Gold? - 11th Dec 19
Gold, Silver Reversals, Lower Prices and Our Precious Profits - 11th Dec 19
Opinion Pollsters, YouGov MRP General Election 2019 Result Seats Forecast - 11th Dec 19
UK General Election Tory and Labour Marginal Seats Analysis, Implied Forecast 2019 - 11th Dec 19
UK General Election 2019 - Tory Seats Forecast Based on GDP Growth - 11th Dec 19
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19

Market Oracle FREE Newsletter

UK General Election Forecast 2019

Solid U.S. Non Farm Payrolls Will Send Gold and Silver to New Lows

Commodities / Gold and Silver 2013 Jun 11, 2013 - 12:09 PM GMT

By: Bob_Kirtley

Commodities

With US Non-Farm Payrolls coming in at a solid +175k, gold and silver prices are set to take another leg lower as a complete absence of additional quantitative easing removes the need to buy gold as a hedge against further easing of US monetary policy. We therefore see both gold and silver prices taking another large leg lower in coming months, with both precious metals hitting new multi-year lows before too long.


Fundamental Drivers

The mechanics at play here are not overly complex, with employment data being the most significant driver of gold prices in recent years due to Fed’s focus on battling the high employment rate with aggressive easing of monetary policy and additional quantitative easing. The Fed is mostly focused on the three month average gain for payrolls, and so long as this number is above 150k, there is no chance of additional quantitative easing.

We have been bearish on gold prices since the start of 2013 for this very reason, and the latest data print has confirmed and strengthened this view. Our thought process is summarized in the below flow chart:

Ignore Broken Records

Many of the bullish arguments for gold are no longer applicable in the current market environment; therefore they should be dismissed in the investment decision making process. Here are five of the most popular, and our reasons for ignoring them.

1. “The US Payrolls data is wrong/inaccurate/a conspiracy, the real situation is actually much worse, so buy gold”

All that matters here that that Fed thinks this data is accurate; therefore they will base their actions on this data. Since the Fed, and only the Fed, decides US monetary policy, it is their actions that we pay attention too, since their actions are what move markets.

2. “Mining costs are high, this puts a floor under gold prices as if it goes much lower the mines will stop producing, restricting supply and holding up the price.”

Gold prices have fallen $500, how many mines have shut down production and cut supply as a result? The supply coming from investors exiting position will dwarf any possible reduction in gold mine production. Plus reductions in mine supply takes years to flow through, therefore it is barely worth considering when looking at the next six months. If anything, all this statement shows, if true, is that the mining stocks are very vulnerable to further falls in the gold prices and many companies may not be viable if prices fall much lower.

3. “The Fed is still doing QE each month so gold should move higher”

The fact that the Fed is still doing its 80bln a month as part of the QE3 announced in September is irrelevant, gold has fallen from $1800 to $1400 whilst this easing was being implemented. The gold market had this easing priced in as soon as it was announced and therefore requires more easing, new easing, to push prices higher.

4. “This is just the paper gold market (referring to gold futures and other derivatives), the physical gold market is still strong.”

Maybe the physical gold price in reality is higher than the gold futures price, but it’s not $500 higher, it’s not even $100 higher and frankly we would be surprised if it were more than 5% higher than spot gold. Our point is that the gold price is much lower across the board, and arguments like the above are merely an attempt by frustrated bulls to distract attention from that fact. If anyone is still prepared to pay $1800 for gold bullion, please contact us and we will be happy to supply as much as you want there.

5. “Gold has fallen a lot; therefore it is due to go up a lot.”

Just because something is low does not mean it cannot go lower, just as if something is high that does not mean it cannot go higher. Markets do not always revert back to previous levels, and if they do why wouldn’t gold be just as likely to go to $1000, $850 or $500 as $2000?

All of the above argument could have been made, and were made by many bulls, when gold was $400 higher. We therefore ignore such arguments as broken records that add no value in the process of determining ones view on market direction.

Technically Vulnerable

Whilst gold made a valiant effort to hold the key support at $1350, it has failed to make a higher high and has really struggled with the $1420 resistance level. In our view it is now a question of when, not if, gold prices break below $1350, and most likely this will happen very soon.

After $1350 we would see $1260 as the next support level, which again will only provide a pause for breathe should we still be without addition QE. Gold prices will reach $1200 by year end in our view, a 13% drop from here.

We think the most likely form of the decline is a slow grind lower, since much of the fast money and leveraged long positions would have been flushed out during gold’s record breaking drop in April. Gold prices have been more volatile recently than they have historically, as the chart below shows, therefore we would expect the volatility to ease and gold to drift south at a more moderate pace.

Silver has broken a crucial support level at $22 and now will move swiftly down to $20 before heading into the teens later in the year.

The $22 level for silver was similar in importance as $1350 is for gold now. Silver remains very vulnerable to a large drop, given how much more volatile it is than gold, and historically it has exhibited a greater tendency for larger, sharper, more dramatic moves down. Silver will struggle to form any kind of rally from here with gold prices falling.

Trading Strategy

We have been bearish on gold and silver since the start of 2013, and therefore have been trading from the short side for most of this year. Previously we had concentrated much of a short exposure in the gold and silver mining stocks, since we held the view that they would fall further than the metal itself, which was correct and we banked profits of 212%, 175% and 135% using put options on gold and silver mining stocks. However, whilst we still think there are some miners that remain very vulnerable, the risk-reward dynamics in being short the mining sector in general are not as favourable as they have been in the past.

So, whilst this strategy has worked well for us over the past few months (our model portfolio is up 45% so far in 2013 as of Friday’s close), we are taking a different approach for this next leg down. We have short exposure through a variety of trades at present (details available to subscribers), and will look to add on any rally, building an aggressive short position.

Conclusion

The forces at work in the gold market are as simple as the flow chart featured at the start of this article. US employment data has been solid, the Fed believes that the employment situation is improving; therefore Bernanke will not be embarking on any additional QE programs in the foreseeable future. The energy behind gold’s bull market has gone. Therefore gold prices are heading lower until further notice. Perhaps a collapse in employment somewhere down the road may put more QE back on the table, and gold could shine again one day. But at present that day is a long way off and gold prices will head much lower before they go higher.

Take care.

Bob Kirtley
Email:bob@gold-prices.biz

URL: www.silver-prices.net

URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.

Bob Kirtley Archive

© 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