Why I'm Bearish on Gold

Commodities / Gold and Silver Stocks 2015 Oct 10, 2015 - 12:25 PM GMT

Tony Mermer writes: Many investors have turned bullish on gold since it fell below $1080 in July, which was the 50% retracement level since gold's secular bull market began in 2001. These investors believe that gold's cyclical bear market is now over and that the secular bull is about to resume. I disagree. Gold will fall below $1000 before this cyclical bear market is over. Here's why.

The U.S. Dollar is Still in a Bull Market

The U.S. dollar is still in a bull market that began in mid-2014. There are two factors that contribute to its bull market.

Depreciation. U.S. inflation is very low right now, historically speaking. Headline CPI is hovering around 0%. The last time this happened was in 2008 when the global economy fell into a recession. With global equities under increasing pressure and global economic growth stalling, there's a high chance that the world might slip into a temporary deflationary state. Deflation is bullish for the U.S. dollar and bearish for commodities such as gold and silver.
Bull markets always have at least two legs. The first leg of this U.S. dollar bull market was in 2014 when foreign currencies were crushed against the USD. The U.S. dollar is now making a massive consolidation before it breaks out. The second leg of the U.S. dollar's bull market has yet to begin.

Gold and silver are in bull markets when inflation is high and the U.S. dollar is depreciating in value. With deflation on the horizon and a stronger U.S. dollar, gold and silver will face significant headwinds.

Gold Has Not Fallen 50% in Over 11 Years

This is an idea that legendary investor Jim Rogers espouses. Gold has not fallen more than 50% in over 11 years. Very rarely does a commodity market rally for 11 years without declining 50%. Gold did not fall more than 50% at any point between 2001 and 2011. Thus, gold is completing that 50% decline right now. A 50% decline from $1920 is $960. Too many investors, fund managers, and traders think that $1000 will be the ultimate support for gold. Bear markets typically bottom when investors give up all hope. Such an event can only happen if gold breaks below $1000.

The U.S. Stock Market's Decline Will Put Pressure on Gold and Other Commodities

Gold often acts as a safety haven in the initial stages of a big correction for U.S. stocks. However, gold usually begins to fall with U.S. stock market towards the end of the U.S. stock market's correction. This is a pattern that has played out very well since the 1980s. Many signs point to lower lows for the S&P 500. This means that gold will head lower too.

The S&P 500 crashed more than 7% on August 24. Every time the S&P 500 crashed more than 5% in one day, it always made new lows in 1 - 3 months. I doubt this time will be the exception. If the S&P 500 continues to decline, it will drag down gold and other commodities.
Earnings season has begun, and the initial reports are mostly weak. Yum and Alcoa have already whiffed on their earnings reports. Perhaps the recent waves of layoffs are an indication that Q3 2015 earnings will be a weak as a whole. This will put increasing pressure on the U.S. stock market.
U.S. economic data, Chinese economic data, and German economic data continue to deteriorate. With the global economy slowing down, demand for commodities as a whole will decrease.

I'm Bearish on Gold's Medium Term Outlook

So now that we've established that gold is in a bear market, here's why I'm bearish on gold's medium term outlook.

Gold has rallied for more than 2.5 months already. Almost all rallies since this cyclical bear market began have lasted less than 3 months. This means that from a time perspective, gold's current rally is getting really old.
Silver has reached its 200 sma. Silver's 200 sma has been very good resistance since this bear market began.

By Tony Mermer

I'm Tony Mermer, founder and CEO of Investing Track (investingtrack.com). We are a privately held quantitative investment firm.

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.

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