Gold’s been making headlines for all the wrong reasons lately as the once ‘darling’ makes a precipitous slide lower. Mind you, I must add that there are plenty of gold bugs still peddling ear-pricking lines like ‘it’s different this time’, ‘it’s a unique asset class’, ‘no one understands it’ and 'it’s drastically underowned’.
The old adage of ‘don’t fall in love with an investment’ may never be truer.
Time will tell, but it’s not looking great at the moment. I mean, the fact that gold hasn’t been able to bounce much from the $US1550 per ounce has me even more worried. The bulls are a dwindling.
Earlier in the week I outlined a number of reasons why I’m bearish and today I’m going to add a few more interesting points to the mix.
Below is a reconstructed version of a chart I found on BusinessInsider and thought it explained what’s happening in gold perfectly.
Simply, what it shows is that there are a few fundamental reasons why gold is declining. When real interest rates were falling, meaning the currency was paying next to nothing, investors were more than happy to move into hard assets as there was little opportunity cost of doing so.
Now that real yields in the US are showing signs of bottoming, especially after the latest Fed minutes, money is flowing out of gold as the opportunity cost of holding it is huge asset classes like equities, for example.
Next, gold has long been viewed as a hedge against inflation and given all the stimulus being pumped around globally, much investment in gold was backed by the premise that inflation was going to be a big problem. Well it may be in the future, but the above chart shows that at the moment, the trend is clearly lower.
Thirdly, a lot of big money has headed for the exit as the latest Goldman Sachs Hedge Fund Monitor shows below.
Since mid-2012 there has been a big sell down in gold ETF investments as a total percentage of the funds long portfolio, to the lowest level in nearly four years.
Finally, earlier in the week, I used ‘US$2500 per ounce by mid next year’ as an example of an outlandishly bullish forecast. Here are some even better ones from over the last few years.
Are they outlandish enough? Exuberant perhaps? I wonder how their longs are feeling right now!
So in my opinion, gold looks seriously vulnerable to the downside and I know of a lot of big money that has entered on the short side this week. Now, that’s not by any means to say that gold will never go higher, it’s just that I don’t think right now is the time to be holding gold.