Gold Market Assessment and Expert Commentary

by the Curmudgeon

Gold Background and Recent Market Action:

The gold market broke down Sunday night. As stated before, the yellow metal’s failure to act as a store of value in times of monetary (Grexit), financial (China), and geopolitical uncertainty (Iran, ISIS/Iraq and Syria, etc.) was incredibly disappointing for gold bugs (like the CURMUDGEON).

In a 2 minute span last Sunday night, sellers dumped 7,600 gold futures contracts covering 24 tonnes on the N.Y. Globex exchange.

A further 33 tonnes were sold at almost exactly the same time in Shanghai. The combined sale of 57 tonnes of gold in such a short period is an extraordinary event in a relatively small market.

“They choose the optimal moment in the early morning and when Japan was closed for a holiday to get the biggest bang for the buck. It was clearly ‘short’ traders using leverage to trigger (technical) stops,” said Ross Norman, a veteran gold analyst at Sharps Pixley.

It's gotten much worse since that Sunday night break below last Friday's close of $1130. August COMEX Gold futures closed Thursday at $1090 – just $10 above Sunday's spike low of $1080. Gold futures have been down 11 consecutive sessions!

Gold Q &A:

The questions I'm asked repeatedly are:

Where's the bottom?
Is there any hope for the gold bulls?

1. Regarding the bottom for gold and precious metal mining shares:

Once a market has a serious break under long term support, it does not just flip around and reverse from bear to bull. There is a lot of base building required and at least one test of the intraday lows. We actually won't know if gold has bottomed till it can climb above the previous support of $1130 to $1145 and stay there. And even then we won't be sure.

Victor twice wrote in these Curmudgeon posts that gold had bottomed. He noted that the trend would be down if gold decisively broke the previous intra-day low of $1131.50 and that's exactly what happened on July 20th."

We both thought that a tremendous base was being built in the $1145-$1200 range which would launch a multi-year rally to possible new highs above $1910. Didn't happen! That base was actually consolidation prior to the next down move in the cyclical gold bear market. The yellow metal is still in a MAJOR downtrend.

Meanwhile, precious metal mining shares, gold ETFs, gold hedge funds and mutual funds are in the WORST BEAR MARKET EVER for a legitimate asset class that represents real, tangible value (not anything like the DOT COMs from 1998-2000).

As a holder of many of these gold/mining share related products, it's been excruciatingly painful. Yes, I have a SUBSTANTIAL portion of my liquid net worth in gold/precious metal related investments.

2. Two very well respected economists say there is a ray of hope for gold bulls (are there any who haven't sold yet?).

A] In a note to subscribers today, ShadowStats John Williams wrote:

Underlying Fundamentals for Holding Gold Remain Solid:

“In recent years, prudent individuals increasingly have hedged the long-term purchasing power, stability and liquidity of their assets with holdings of physical gold, against the ongoing likelihood of massive debasement of the U.S. dollar and other financial-system disruptions, both domestic and global. Central banks balk at that concept. If the price of gold rallies, with a flight-to-safety into the precious metal, such usually reflects negatively on central-bank policies when financial-system stability is the issue.”

Accustomed to being an iconoclast or “voice in the wilderness,” John believes that Central bank intervention appears to be a primary reason for gold's recent sharp decline. In the past, many other market pundits have claimed the Fed (or one of its proxies were selling gold futures contracts on the COMEX). Paul Craig Roberts has become the poster child for that conspiracy theory.

Consistent with the Curmudgeon's thinking, John says that the underlying fundamentals for private investors to hold physical precious metals have strengthened (not weakened) since the near-term peak in gold and silver prices in 2011. We've thought that was because of never ending debt monetization (AKA QE), monetary instability (i.e. Euro), and geopolitical hotspots that could blow up and wreak havoc on the world economy.

Now for John's conjecture: “The mysterious market manipulators here almost certainly are the U.S. Federal Reserve and/or other major central banks, operating through their agents in the investment and banking community. If it were otherwise, "concerned" regulatory authorities certainly would be investigating such blatant and damaging market manipulation.”

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Note: Curmudgeon does NOT believe that the Fed or other central banks were behind the recent plunge in gold futures. We think it was due to coordinated selling by several large institutional investors

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John concludes by stating that the underlying (weak and deteriorating economic, financial and political) fundamentals eventually will overwhelm and overcome the interventions/manipulations in the gold market.

For sure, patience, determination and deep pockets will be required for this to play out.

B] In an article and video today on Kitco News Jim Grant says the decline in gold is “a wonderful (buying) opportunity.”

"Gold is an investment in monetary and financial disorder - not a hedge. You look around the world and you see exchange rates are properly disorderly, when you look around the world of lending and borrowing -- we are in a regime of price control by another name, so-called zero percent rates and quantitative easing by the world central banks -- we are in one of the most radical periods of monetary experimentation in the annals of money," Grant said.

“I take my losses in all different forms,” Grant said. Those forms also include “all too many gold mining shares.” We could see some mines shut down and bankruptcies amongst leveraged gold mining companies, he added.

Grant explained that no one knows the bottom for the metal, and that it should not be the sole focus. "The important thing to recall is why those of us who own it, bought it. What is it about gold that ought to make it appealing -- when it seems to be absolutely the thing you don't want to have."

He added that gold thrives in the face of monetary turmoil, disorder and uncertainty, noting, "I think we have all three of these things."

Note: Curmudgeon has the utmost respect for Jim Grant. I've read his columns since he was the Interest Rates reporter at Barron's and was a “paid up” subscriber to Grant's Interest Rate Observer for many years. I was fortunate enough to meet Jim at the February 1997 Jack White &Co Investment Advisor conference where he was a keynote speaker. We had a very pleasant lunch together after that where we talked on many different financial and economic topics.

Grant thinks there's a good chance of more Fed QE in the future, even though they'll likely raise short term rates this year. He commented on the current ultra-loose global monetary policy:

“The only thing that is dynamic in the world of money and credit is the issuance of more and more dubiously sourced debt, and more and more lenient terms," Grant said.

Conclusions:

If gold really is money (as Victor and others believe), then as fiat currency geometrically increases (check the Fed's balance sheet growth since 2008), gold should be worth a LOT more in paper money!

What's remarkable is that the Curmudgeon and many others INCREASED their allocation to the gold/precious metals asset class as QE was starting in earnest and before Greece went bankrupt and threatened to leave the Euro zone. The thinking was that would cause a “flight to safety” into gold and related investments. The exact opposite has occurred, at least since September 2011. Gold bullion is down over 40% and many mining shares down 80% or more with some selling at 20 year lows, below book value and with free cash flow!

We can only express profound disappointment and bewilderment at gold's ongoing bear market and the total decimation of mining shares.

The only take-away from this very painful experience is that market action may defeat fundamentals (or historical comparisons) for a very long time. Therefore, don't add to losing positions and exercise loss discipline/control for capital preservation when the primary trend is negative.

Good luck and till next time...

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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