What’s Up with Gold Being Down So Much?
''First of all, gold is still up for the year - about 7%, up from $1060 per ounce on January 2 to $1140 as of this writing. But, it is down hugely from its summertime highs of around $1350.
The drop came in two parts - one in October, with a modest recovery just before the election, and a second big drop after the election with declines continuing to this day.
The big question now is whether the big rally in 2016 was simply a head fake that has run its course or is it an indication that gold is finally turning a corner? Clearly, if gold falls to $1080 by the end of December it will look very much like a head fake.
However, lets look at some of the drivers behind the rally and the bust and see if we can’t learn something about a potential change in investor attitude towards. And, whether now might be a time to buy the dip.
We think that part of the reason for the big rally of 2016 was the poor performing stock market in 2015. The Dow closed down about 2% in 2016. The markets fell more in January creating more fear in investor’s outlook for 2016. The price of gold rose on this fear and, even after the market recovered most of its losses, gold held its gains and rallied again going into the summer.
The fact that gold didn’t fall after the stock market recovered indicated increasing fundamental strength in gold. That’s a positive for gold in the long term. In the shorter term, gold gave up some of its extraordinary gains in October, but it had still performed very well for the year.
The big problem that hit gold in 2016 was the November stock market rally. That rally in stocks took away gold’s big gains for the year. So, could this important driver of the price of gold change going forward? We think the downward trend is unlikely to change as long as the stock market remains strong. With the Dow very likely to go over 20,000 and maybe a bit beyond based on the euphoria of achieving that milestone, the upward trend in the stock market will keep downward pressure on gold.
As we move through 2017, the situation is likely to change. We think the more positive outlook for gold we saw earlier in 2016 is likely to re-surface in 2017 when the stock market sees a significant decline.
What do we mean by significant? We mean a decline below 18,000 and, more importantly, 17,000. That’s a 10% to 15% decline in the market. However, that size of a decline is unlikely to happen in the first few months of the year. Again, the general euphoria likely to surround the stock market when it passes 20,000 will likely carry through the first quarter.
Of course, that’s assuming no market disruptions from a bursting of the Chinese credit bubble. The Chinese credit market is showing signs of stress in December. It had to halt trading on some bond futures. China also had a failed auction of short-term government debt.
The Chinese government will work hard to stabilize the situation and is likely to succeed in the short term. But, the government has been trying for years to keep credit markets stable. Now those efforts are clearly having less and less effect.
If the Chinese government continues to have problems maintaining their credit bubble, stock markets will get rattled, even if the bubble doesn’t fully pop. A full meltdown in Chinese credit markets would be a game changer for world stock market.
There are other forces affecting the gold markets in 2017, such as a rebound in Indian jewelry demand, a new gold ETF that Muslim investors in the Middle East can easily purchase. But, we see a positive or negative stock market as being the primary influence.
Of course, any intervention by central banks will have a negative influence on the price of gold. We don’t expect that to change in 2017. Central banks will likely continue to exert some downward pressure on gold.
So, if you expect the stock market to be strong throughout 2017, gold will likely not do well. However, we feel that, without money printing, or a huge positive change in economic growth, it will be hard for the stock market to avoid a big decline. The Fed will move in to save the stock market if needed, but it is now a reluctant warrior and would rather normalize policy than go back to massive money printing.
Corporate tax cuts will clearly be a positive for corporate earning and we expect to see a significant cut. But, with stock market valuations very high, the only way to keep them very high is to do the same thing that got them so high in the first place – massive money printing.
So, how to approach gold in the coming year? WE don’t suggest taking a big bet on gold right now. Stay away from gold ETFs until we see a change in the stock market.
However, buying some physical gold is a way to take advantage of the current low prices, which we don’t think will go that much lower. The fundamentals for gold long term are good, but in 2017, the price will depend to a large degree on the stock market. No need to guess when that will change. For now, best to be careful with big purchases and continue to slowly build your physical gold position at these low prices.''