Our mid-year Gold Price Prediction. In December last year, we published a report on potential future gold price movements. The following is from the final paragraph of our December article.
“Take a stand and pick a direction, purely because contrarians are remembered. I will go out on a limb and say $1,200 an ounce here we come! I would tackle the trade by selling under last year’s key. Support levels of $1,520 booking profits at $1,250 and swinging the position to get long.”
And here we are at $1,250 after a strong bounce from just under $1,200. Amid a battle in the gold market of fiat currency expansion verse Western deflationary pressures.
Events that could move gold prices in the future
To start, let’s look at what have been the main contributors to the recent sell-off, and hopefully, that will help us gauge potential future events that could move gold prices in the future.
Technical
To start with, the sell-off could largely be attributed to being technical. As we pointed out in the December article the levels used to predict the price momentum were largely technical. When the price of 1,520 was breached a large number of stop losses were hit (selling into the market), clients that were long and leveraged up had to close positions and flee from the market (selling into the market) and the price momentum encouraged traders to take advantage and sell into the market, creating a snowball effect.
There were also a number of major investment firms advising their clients to short the price of gold, Goldman Sachs comes to mind.
The price falls to around the 1,200 level also represents a Fibonacci retracement level (a popular form of technical analysis) from the 2 ½ year bull run from late 2008 to 2011.
Fundamentals
The fundamentals that pushed gold higher through 2008 – 2011 appear to have changed and the market has somewhat lost faith in the reasoning behind some of these factors as prior speculation has not been matched in economic data.
US Federal Reserve and Asia
The expansion of the US monetary base by the Federal Reserve (known as Quantitative Easing {QE}) was expected to create inflation in the US. This inflation has not been seen in Western CPI figures due to weaker economic growth. Hence this reason for holding gold has reduced.
This expansion of the monetary base, of which many were skeptical, has helped to improve the domestic US economy. This means that the US no longer needs to increase its monetary base so aggressively. This again reduces future inflation concerns.
The two main consumers of gold are India and China. Recently India introduced laws to curb domestic consumption of gold. China is also suffering from domestic economic concerns with rumors of ghost cities appearing across the country and fears of an internal GFC-style debt crisis are whispering through the market. The Shanghai Composite was down approximately 20% in June and recent data from China has been the weakest in some time.
So lining up with the technical break-down levels was this story of a stronger US economy and a weaker Asian economy, opposite of the stronger Asian economy and the weaker US economy which had a major support for gold from 2007 – 2011.
These are two key medium-term factors in the gold market. Either the story in China is not as bad as thought and we will see a bounce from here in Chinese equities and metal prices. Basically strong China means strong gold due to both domestic demand and demand from Chinese Central Banks.
Or China is as bad as the speculation. Ghost cities, slowing growth, reduced global demand for manufacturing, less urbanization of China’s population, etc. China is now a major player in the global economy and largely responsible for supporting commodity prices since 2008. Trouble in China will results in slowed growth globally. If this is the case there will more than likely continue to be reductions in import demand for gold from China and further reductions in inflation concerns globally.
US Economy
The US is the other major factor. The irony with the US economy is that QE has supported the economy and been largely responsible for bringing the US economy to where it is now (have you noticed how much cheaper the US manufactured cars have become in Australia?).
Either the US will be able to maintain this positive growth and continue to tick higher which will reduce the need for this weak US Dollar policy (QE) and help strengthen the US dollar and end this expansion of the monetary base. Both of which will be bearish for gold.
Or the US can’t survive without QE and a reduction in QE will lead to US equity markets falling, US exports falling, US unemployment rising, and growth slowing. This would lead to the Fed needing to continue with the weak US Dollar policy expanding the monetary base which would strengthen metal prices and again increase inflation concerns.
We scrap the conspiracy theory that the World needs to re-establish a gold standard because it is highly unlikely to happen. Since the introduction of paper currency in China before the 10th century, the world has repeatedly fought the contractionary effects of a gold standard. And we would make the argument that the world’s gold supplies cannot expand fast enough to match the world’s rate of economic growth, which has exacerbated since populations began to increase rapidly at the beginning of the industrial revolution.
Gold Price Predictions Mid 2013 – 2014
Anyway onto the point and reason you have bothered to read this article, the price levels to watch. Once again arguments can made for either side of the trade-coin. If we see a break of the recent low of 1,180. Who knows that 1,000 is going to be looking very likely to hit and after that. We could be in the midst of a serious contraction in commodity prices. So a sell order at 1,175 on the recent break down looks like a decent play.
However, the trade that we really like (the contrarian view) is the length. There is a nice reversal pattern on the weekly chart. And we do feel that the market will be seeing value at current price levels. Central Banks involved in mass-purchases close to these levels in 2010. With a move above 1,325 prices could run back up to the 1,500 level. After which we could likely see some consolidation. Perhaps 1,300 – 1,500 before breaking above the 1,500 marks convincingly and running to record highs. In the medium-term, there is potential for 175 points in either direction on a break of these levels.
Both trades appear to be decent to setups and fundamentally supported. But it should remember when setting the trade stops should use to protect your account balance. Also worth mentioning is that a market often falls faster than it rises. So whilst the short play could happening quite quickly, the long play is likely to be a slow grind higher.
A solid indicator for price momentum moving forward should be equity market indexes. We have seen equity markets and gold rallying and selling hand-in-hand over the past 3 years. However, we believe that the traditional relationship of weaker equity prices equalling stronger gold prices. And vice versa will be moving forward from here due to the reason mentioned.
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