Monday, 17 June 2013

1000 gold – various 1000s - plus the search for a $999 Krugerrand.

1000 gold – various 1000s!

When I first named this blog, it was late 2007 and gold was getting near to breaking through the old high from 21 January 1980, which was $850 on the London Fix or about $887.50 on the April 1980 futures price.

So, 27½ years had gone by before gold was finally about to break the back of the bear market and make a new high, so it could finally be said to have arrived at a real new bull market.

At the time, I considered names for my little gold blog. The 1000gold one stood out at me and I never really considered calling it anything else. I felt rightly that gold would reach $1000/ounce in time.

The first 1000

In fact, I didn’t have to wait long, because gold did break above the old $850 high in late 2007 and went on to rally to $1030 by March in 2008. That preceded the buyout of the famous investment firm Bear Stearns, after which gold began a sever correction back down in price. The credit crisis of late 2008 further hit the price as the even more famous firm Lehman Brothers collapsed in September and gold fell to around $680 at the low.

The second 1000

Somehow, I never doubted for a minute that gold would get back to $1000, because the financial crisis laid bare the unpayable levels of debt in the economies of the western world, in all sectors, personal, corporate and government. It revealed the shaky foundation of all financial investments that had any kind of a debt as their basis, that is, most financial assets in existence today! Gold seemed the perfect antidote.

Gold broke back through $1000 in late summer 2009 and moved quickly to around $1224. Despite the fact the speculative open interest was already at record levels as it passed through $1000, another $200+ dollars had been added to the high. Gold has so far never revisited $1000 again.

The third 1000

Jim Sinclair had his famous longstanding million dollar bet that gold would reach $1650 in early 2011. No-one took him up on his bet, which is a shame because he was wrong and gold failed to meet his target at the appointed time. However, as Sinclair ascended the podium on a sweaty early August day in summer heatwave of 2011 in London, he did so knowing the gold price had reached its target virtually that very day.

Everything seemed set fair for gold at that time. Silver had already streaked to just under $50 in Arpil and May 2011 and had crashed but was seeing a buoyant bounce back into the 40s. Gold was now in an accelerating uptrend, making new highs almost every day.

Since the British Pound was about $1.60 at the time, gold went into four figures just before it got to Sinclair’s dollar target of $1650. Gold was £1000 an ounce! As a Brit, I found that amazing. I had not really thought about gold reaching 1000 Sterling when I was interested to buy Krugerrands for £225 back in 2002. During the early 2000s, I thought it would be nice if $850 was reached and great if $1000 was exceeded but £1000? It didn’t really enter my mind until it happened.

When gold peaked at $1920 in early September 2011, it was around £1175 in sterling, quite a shocking level and a 1 ounce Krugerrand, Eagle of Maple Leaf was likely to cost about 1200 quid as we say over here. That seemed like a lot to me for a lump of yellow metal but I was very happy, because I already had some. It encouraged me to sell a bit to raise some cash, very wise, it turned out but not wise enough.

The fourth 1000

I almost omitted the Euro! Of course, during the magnificent bull market in gold, the price reached 1000 Euros. This was on the first leg of the Greek Euro zone debt crisis, in late 2010. Greeks were reportedly paying huge premiums to get gold coins at this time. I heard a report that 0.9675 ounce Saint Gaudens $20 pieces were going for about 1500 Euros as the gold price per ounce was around 1100 in the same currency.

It is strange that the initial phase of the Euro crisis took gold up to about €1400, $1900 and £1170 but as soon as it became clear that systemic bank failures across the world could happen as a result, the price cratered, as it did in late 2008. Perhaps due to financial derivatives, most of these unpayable debts would finally be due in dollars in the world’s main financial centre of New York. Therefore, the dollar was going to be demand and was due to strengthen and gold, which had recently been very overbought, was going to take a big hit.

The fifth 1000

I had hoped that the next millennial mark in gold would be a visit above the goldbugs’ favourite desire of the year 2011 – to reach $2000 per ounce. However, this was not to be.

Gold’s magnificent high of $1920 of late 2011 fell just short and was not confirmed by a new high in silver - somewhat ominous I thought, although I didn’t change my bullish view of the market. I should have. This divergence was most important. Silver had an explosive high in May while gold struggled to make a new bull market high at the time, though it eventually made it to above $1500 before silver topped and did its crash. Then later in the year, gold made a parabolic upmove to $1920 without any corresponding new high for silver. Though silver followed gold, it made a lower peak in September, not a higher one.

The correction in gold price in US dollars was getting quite severe, with several visits to the $1520-1550 level. With the pound at about $1.50-1.55, gold started to make dips down below the £1000 level. However, the pound was a bit weak against the dollar and the gold correction did not look as bad if you were a UK-based goldbug. The price recovered safely over £1000 on each occasion, which seemed reassuring.

Then, on the April 2013 crash, the price went decisively under £1000, never yet to return above it. This is the fourth visit to a 1000 level, this time in the wrong direction...

The sixth 1000

Now, as I look at my $GOLD:$XEU chart (gold in Euros), I notice that the crash of 12-15 April 2013 took the Euro gold price to a low of €1002, escaping three figures by a mere hair’s breadth! Right now, it is €1038.59, so we are awfully close to seeing a fall below 1000 Euros. ... I am going to make a quick update. The day after I posted this article, gold plunged below $1300 and now stands at $975 Euros, so this 1000 level has now been broken. Are we heading for sub-$1000 now?

The seventh 1000?

So what happens next? Will gold go into three figures again in US dollar terms? Will you be able to buy a Krugerrand for $999 or less? Sadly, it would not surprise me much, although it would shock me. Gold’s performance over the last few months has been very poor indeed and there is no sign of recovery in the price, not at all.

This is not like the crash of 2008. In that crash, the dollar strengthened by 25% and the US dollar index went from about 71.3 to 90. Just about everything else, except for Treasury bonds, crashed: gold, silver, oil, just about all other commodities, most stock markets, most housing markets in the western world, bank balance sheets, you name it.

It is true that the current gold decline at 32% ($1920 to $1321) is not (yet) quite as great in percentage terms as the 2008 decline, which was about 34% ($1030 to $680).

However, gold, silver and to a lesser extent some other metals have been almost alone in declining in the face of a recovery in house prices, fairly stable bond prices and significant new highs in the US stocks indexes, as well as big run-ups in other stock markets such as those in the UK, Germany and especially Japan. Gold has tremendously underperformed, to the extent that the Gold:S&P500 ratio has gone from 1.6 to about 0.8. US stocks have outperformed gold by about 100% in the last 18 months!

There is not really much sign of a turn. Stocks have had a little stumble lately (especially in Japan!) and gold has been pretty flat during this hiccup. In the last couple of weeks, the US dollar index, which had been strengthening, has been hit from about 84 to 81 but with practically no upside response from gold. This shows the true weakness in this market, as it means that is must therefore have declined in almost all other currencies and is back at the mid-April lows when priced in most of them. That is inauspicious in my view.

Maybe we are nearing the bottom in gold. Possibly we have passed it but I would not bet on it. The chart still looks fairly awful and primed for a possible decline. My guess would be another $240-270 from where it is now at $1385, at the tip of a pattern that looks like a possible bearish pennant. So a move to $1115 is possible, though a plunge into 3 figures looks doubtful on any imminent decline. Maybe there will be a bounce and a further leg down to new lows. I think $890 is possible. This would be a Fibonacci style ‘golden ratio’ 61.8% correction of the entire bull market that went from $253 to $1920. By amazing coincidence $890 was the high on 21 January 1980 in the gold futures market!

In that case, the correction or bear market in gold would be similar to the 60+% correction of the uptrend in the middle of the 1970s bull market, possibly paving the way for a manic 8-fold bull market mania to follow as per the period 1976-1980, which, taking into account the slower pace of the post 2000 bull market, could take gold to $8400 between the years 2020-2025, in my estimation.



No comments: