Further Moves Lower in Gold Seem Unlikely
Based on the December 30th, 2011 Premium Update. Visit our archives for more gold & silver analysis
We are on the cusp of a new year, and this is the time that we take a look at those brave (or foolhardy) financial analysts who take out their crystal ball and predict where precious metal prices will go in 2012.
But first let's see how last year's prognosticators (including Sunshine Profits) fared. We are talking about predictions for the very chaotic 2011.
Bank of America Merrill Lynch had forecast last year at around this time that gold would top at $1,500 in the near-term and that the second half of 2011 would be more challenging. Well, gold did a lot better than $1,500 this past year. It hit an all-time nominal high in August of $1,923.70 an ounce. Gold may be down about 16% from the August highs, but it's still up roughly 14% from the 2010 settlement of $1,421, which still makes it one of the best performers this year. Even with prices falling again this week, the metal is still the top performing commodity of 2011.
Peter Schiff said about gold prices: "You ain't seen nothing yet." He was overly optimistic and predicted that gold will go up to $2,000. He might yet be proved right, but not in 2011.
James West, publisher of the Midas Letter, said gold was likely break through $1,700 an ounce by the end of 2011 and silver will likely see $35, and may even go through $40 an ounce. Well, he was right. Gold definitely broke through the $1,700 an ounce range.
Nick Barisheff, president of Canada's Bullion Management Group Inc., was looking at $1700-to $2,000 per ounce gold in 2011; he was within the right range.
At Sunshine Profits we also went out on a limb and guesstimated gold's high for 2011 at $1,800 and $45 for silver.
A review of 2011 shows a chaotic picture for the precious metals. During the first few months of 2011 the price of silver sharply outperformed the price of gold and by the end of last April the price of silver rose by nearly 56%, while gold rose "only" 9% from the beginning of the year. With the sharp rise in silver prices the CME raised margins which caused silver prices to decline to 7% above the initial price level of 2011. The next rally came from May to the beginning of September for both metals due to uncertainty about the stability of the U.S. economy and the debate about raising the debt ceiling. The rally came to a halt in September due to the CME raising margins and also because the Fed did not come up with QE3. The decline of precious metal prices soon followed.
To predict how precious metals will behave in the short run, let's begin the technical part with the analysis of the USD Index. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)
Our first chart is the very long-term USD Index chart. Little has recently changed and what we wrote on December 27th, 2011 in our essay on the possible bottom in gold is still up-to-date:
Concerning the very long-term USD Index chart, we would like to stress that the dollar has not truly broken above the declining long-term resistance line, and it has not moved above the 2011 high. Consequently, one should not be overly bullish on the USD Index just yet.
The index is still below the early 2011 highs and we do not view the breakout above the long-term resistance line as being verified. A move to the downside appears to be quite likely in the coming weeks.
In the short-term USD Index chart not much changed as well. The index level initially moved lower and then moved back up to the level of its previous high. The index is now at a cyclical turning point, and this increases the probability that declines will be seen here fairly soon. With the next support line more than 4% below the level of Thursday's close, the coming decline could be significant.
On the SPY ETF chart, we saw a move to the upside early in the week, followed by a correction and another move higher. Volume levels have been quite low, however, so it's unclear whether the recent breakout is confirmed or not. In terms of price, it is confirmed, but in terms of volume, the situation is quite cloudy. At this point, it does not seem very probable that stocks will rally immediately. It is a bit more likely than not however.
The Correlation Matrixis a tool which we have developed to analyze the influence in the coming weeks of the currency markets and the general stock market upon the precious metals sector.
Gold is negatively correlated with the USD Index in the short and medium term. The coefficients are very low and thus significantly negative. With the outlook rather bearish for the dollar at this time and its correlation significantly negative with gold, the implications are somewhat bullish for gold and the entire precious metal sector.
The situation with the general stock market is unclear at this time and therefore somewhat uncertain for the gold and silver mining stocks. It seems however, that since the currency markets have a bigger impact upon the precious metals, the entire sector, including the gold and silver mining stocks are likely to rally if the USD Index declines significantly.
Currently, there is not a clear link between the general stock market and the precious metals sector. The strong negative correlation between the USD Index and gold, silver, and gold and silver mining stocks is still very much in place. The implications here are rather bullish overall for the precious metals sector.
Summing up, the situation in the USD Index is more bearish than not. The breakout above the declining long-term resistance line may be seen at some point, but until it is seen and verified, this situation here will not turn to bullish. The currently bearish outlook for the dollar translates into o rather bullish outlook for precious metals.
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Thank you for reading. Have a great and profitable week!