EDITOR: | October 1st, 2014

Gold investors looking for rally may have to wait a little longer

| October 01, 2014 | No Comments

Is October the time to turn contrarian or fearful on gold?

goldconsipr copyThere is a plurality of analyses, most pointing to a bottoming out of the gold price, some advising caution. But no one is predicting that gold will drop down to zero. While there seems consensus that gold is soon to become bullish, there is uncertainly as to when it will happen. Gold is too complicated to pinpoint to a narrow time boundary.

Despite summer forecast for a bully September, September remained a time to be fearful: it was not good to gold. The U.S. Comex gold futures fell 5.91% during September for a consolidated total of 8.43% in Q3. The monthly loss was the worst since June 2013. Year-to-date, the gold futures have risen just about 0.70%.

Contrarians argue with convincing data and analyses that gold-related indices are at an all time low but prudence shows the September numbers are still bearish.

According to the Commodity Futures Trading Corporation, the managed money combined net gold positions dropped for six consecutive weeks to 44,265 contracts, a 69% decline from early July. The short gold contracts have approached the recent peak level as of December 2013. According to Barclays, the gold-backed ETP holdings are negative, falling 27.5 tonnes in the month to 25 September and 77.4 tonnes for the year. This paints a bearing picture for gold.  The question is whether the gold market has consolidated most of the bearish news or if there is more to come.

The Ned Davis research index of gold sentiment is the lowest it has been from data reaching 30 years back. They have data going back to December 30, 1994. Their chart of sentiment right now is basically at zero.  In principle this means that a quick shift in sentiment should open the bull pen.

As well the Mark Hulbert’s gold sentiment index is now at the second-lowest level ever. According to Hulbert, “There has only been one time in the last 30 years when the HGNSI got any lower than it is today. That came in June 2013 when it fell to minus 56. Today it’s at minus 46.9.’ Back then gold rallied by more than $200. Should we expect a similar or even better rally?

The short answer is no, maybe, or perhaps. Gold does not trade to follow the indices; rather the indices follow gold trading. We may be in a spot where the charts and indices have never been before.

Fundamentally, to know where gold is going we need to understand where the world is going: It seems China’s economy is slowing down. It seems the global stocks are slowing down. Unemployment in Germany is higher than expected. The US dollar is rallying owing to good US labor market data. We have the new Cold War with Russia and the ISIS conflict may escalate to a ground conflict.

In the current context, predicting that gold will go up is easy. But predicting when it will go up is a lot harder. It is like paddling across the ocean in a canoe: tides, currents, winds can push you in all kinds of direction. With perseverance, a ton of Gatorade and a gallon of sunscreen you’ll end up at your destination. But it would not be wise to book a hotel room at your destination yet.

Dr. Luc Duchesne


Dr. Luc C. Duchesne is a Speaker and Author with a PhD in Biochemistry. With three decades of scientific and business experience, he has published ... <Read more about Dr. Luc Duchesne>

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