Gold Eyeing Another Summer Bottom?
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Not since the 1990s has gold fallen more than 35% off highs. None of the declines since 2006 exceeded that level from its cycle highs. As the metal attempts to complete its first rising month since March, the debate ensues between the bulls and bears.
Over the last 3 months, a series of factors conspired to punish the price of gold: slowing global growth; reduced commodities’ appetite from China; chatter that Italy (4th largest owner of gold) may start selling reserves; fears of margin hikes in China; India’s restrictions on gold imports, the Federal Reserve’s selling naked gold ETF shorts in order to rebalance the 50-1 ratio of buyers-sellers of bullion; and the violent unwinding of long positions by speculators and hedge funds.
Just as the Fed is perceived to have done, other central banks are also believed to have contributed to the fall via efforts to stabilize their currencies. France has limited cash transactions to €1,000 and Germany tightened the purchases and sale of gold.
The bearish case is bolstered by US inflation drifting at 40-year lows, 10-year yields at 3-year highs and the Federal Reserve growing vocal about reducing bond purchases this year. All in all, gold prices face a tough barrier. And as prices fall below production costs, this will reduce demand in the metal after a 12-year bull market.
The bullish case holds that mine closures resulting from falling exploration projects will take prices higher. Other gold bulls don’t believe the economy is on the mend, nor expect the Fed to reduce bond purchases. If anything, they believe the Fed will be forced to step up asset purchases in H2 2014 after failed attempts to tighten monetary policy.
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