Update on Gold

Back in early September I wrote an in-depth analysis of the gold market. My working thesis was:

"...I believe the most likely outcome for the precious metals markets is to be for a fairly prolonged period of stagnant prices. This period would likely be accompanied by relative underperformance of other asset classes due to the financial problems that will persist in the global economy. This process has been underway for the last 6 months (dating from the March 08 high) and may persist for as long as another 12 months. After such a period, the technical and psychological components to the precious metals markets will be more amenable to another multi-year period of rapidly rising prices."

So far, three months later, this thesis is playing out as gold has been bouncing between the $650-900 range I had projected.

I don't remember ever getting more hate-mail from something I have written than after this article. And that only further confirmed my opinion that gold was likely in a phase where there was too much bullishness, and that needed to be slowly bled out of the market before higher prices could prevail. Another indicator of too much bullishness is the apparent premium people are willing to pay for small denominations of coins and bars on EBay, when they could simply take delivery on a futures contract at a steep discount. On Monday of this week, we saw a stomach wrenching decline in all assets, gold included.

There are some very interesting technical things to look at with gold, primarily how it has been reacting to it's 200 day EMA. It bounced cleanly off that line a number of days ago and now looks like it wants to test it's low of $681 (which was a clean bounce off the 200 week EMA.) I don't think that level will hold and we could see gold prices in the $600-650 range in fairly short order. This would be in reaction to the growing deflationary pressures in the economy, and another bout of strength in the US Dollar. I am adjusting the lower range of my thesis to allow for a potential 0.618 fibonacci retracement of the entire bull move from $255-1033. That would give a worst case scenario of $552 on the downside. A 50% retracement of the entire move is $644. So my lower target range is between $552-644. I think the declining 200 day EMA should do a decent job of containing any upside thrusts (currently at $831.)



I continue to believe that gold is in a multi-month corrective phase that could last until the summer/autumn of 2009, but is in the middle of a super-cycle that will eventually take it much higher. There will be both large rallies and breathtaking declines during this period, all trying to shake out every last believer in the usefulness of gold. If you are a holder of physical gold or silver, I see no cause for alarm. The fundamental reasons for owning it as a portion of your assets still remain - and always will. However, I would not be making speculative bets on the rapid rise in price over the near term.

I still remain a fundamental gold bull. And other bulls should be reminded that relatively, it has outperformed every other asset class except US Treasuries or Japanese Yen year-to-date. Although that may not be of any consolation to holders of gold mining stocks, holders of bullion are still doing okay this year. If the price were to drift down toward the $552-644 range I mentioned, and the premium charged to buy it was to come down to more reasonable levels, I would consider increasing or initiating positions in the metal - especially if such weakness was part of a broader deleveraging panic in other markets.