Have seen the low? Have we got further to fall? Where and when will it all end?
A word of warning: much as I’d like gold to be higher, I can’t argue with the price – and neither can you.
I offer my opinions as to where it’s heading next – if those opinions don’t tie in with yours, I’m sorry.
I can only say what I see.
The year so far for gold and silver
Let’s start with some stats.
Gold is now trading at ,160 an ounce. Its high for the year was ,392 and its low last week was ,130.
It began the year at around ,200. So, believe it or not, it’s actually only down a few percent in 2014. But that’s because gold began the year near a low. From its September 2011 high of ,920 an ounce, it has now fallen some 40%.
Silver, once the bubbly relative, is the even uglier sister. It is down some 70% from those heady days of April 2011 when it was an ounce. It began 2014 at , and its high was . It touched last week, and now sits at .70. So, even though – like gold – it began 2014 on a low, it’s down another 20% since then.
By the way, I hold my hands up and admit I’ve been far too slow to recognize this bear market for what it is. I had ,500 as a key level, and should have sold when that level broke. I guess I was too consumed by gold bull market fever. It wasn’t until late 2013 that I got on the short side. It should have been sooner.
Making the bullish argument for precious metals
You can look at precious metals relative to stock and bond markets and argue that they are starting to look compellingly cheap.
You can look at mining costs and conclude that ,150 is simply unsustainable. The industry average all-in sustaining cost (AISC) of gold mining currently stands at around ,100 an ounce. But for the complete cost – finding a mine, developing it, financing it, building it, running it and paying tax on it – the industry average is close to ,600 an ounce, according to Scotiabank.
The cost of mining gold is above the gold price. More and more mines will be shut down. Exploration has long since died out. Nothing new will be discovered. So before long, there will be a shortage of metal, assuming demand stays constant.
You can look at rising geopolitical tension. You can look at Asian demand. There’s even the fact that Isis (of all people) wants to re-introduce gold- and silver-backed dinars.
You can look at debt, which is way in excess of the levels that caused the financial crisis. You can look at unsustainable government spending and central banks debasing their own currencies. You could look at all the money that’s been created by quantitative easing (QE) and say that when it hits the real world, it will cause serious inflation.
You can look at the paper markets, see huge volumes of gold being dumped when the markets are quiet (clearly to drive the price lower) and conclude that the markets are rigged. You could conclude that the shorts can’t deliver the gold they’ve sold, and that one day this is going to lead to the mother of all short-covering rallies that will drive the gold price to the moon and beyond.
You can look at any of those things and more and conclude that the gold price should be rising.
But the reality of the ticker is that it isn’t.
Like it or not, gold is out of favor
All markets are driven as much by sentiment and psychology as by anything else, but this is especially true for the gold market. And while it might sound glib, gold is out of fashion. It won’t be forever, but it is now. However much you might shake your fist and rail at it, that is the reality of the price.
I know many of you won’t like this – but that is why I don’t think this bear market is done. Trends can go on for much longer than you think – how many times have I said that? They defy logic and expectation.
Of course, gold is way oversold at the moment, so some kind of recovery rally is bound to be around the corner. But the broader trend is down.
Every high is lower than the last. The lows get lower. The moving averages are all sloping down. The price is below all of them. It’s classic downtrend stuff.
I targeted a low for the year of ,050, or just below. This is based on simple price action. ,050 was a line of resistance in 2008. Then it was the springboard for the 2010 rally out of the financial crisis. It’s an obvious line of support. I don’t know if it’ll get there – nobody does. But it’s only another 8% or so lower from here. And if ,000 doesn’t hold, then 0 comes into play. After that, 0.
I must say, I don’t expect ,000 to be broken – but such is the sentiment it wouldn’t astound me. My point is not to underestimate how low sentiment could drive this thing.
Something needs to happen to change this negative psychology. Perhaps it will be the Swiss referendum vote at the end of the month. Perhaps China’s central bank will announce its holdings and the numbers will take everybody by surprise. I’m not holding my breath, but who knows?
Silver is still too popular for my liking
As for silver, we’ve hit my target of . There’s support there, and it would be a nice number for a low, but I still have grave concerns about the silver exchange-traded funds (ETFs).
Silver holdings are still, even with 70% falls in the silver price, at near record levels. Bear markets do not end when record numbers of people own the asset in question. They end when hardly anybody does.
This chart from Nick Laird of Sharelynx shows the silver price in black, and transparent holdings in blue. It is my view that a large portion of those holders need to sell before the bear market ends. (In the case of gold they already have – holdings are down some 35%).
Hardcore gold bugs often buy silver rather than gold. They buy it for the extra leverage. There are still too many hardcore gold bugs, in my opinion, for this bear to be over.
That’s not a criticism of gold bugs – heck, I’m one – it’s merely my observation of what bear markets do.
Typically, at market extremes you see a gold-silver ratio of 80-90. In other words the gold price is 80 or 90 times the silver price. We got that when silver hit its low in the early 1990s (the ratio was 95 in 1991). It reached 88 in 2008. We’re currently at 76, so we’re almost at the lower end (80) of my target range.
With these levels in mind, if gold goes to ,050, then the - zone comes into play for silver. So those are the kind of eventual levels I’m currently looking at – though, as I suggest, some kind of bounce here looks likely.
Gold’s time will come again, and so will silver’s (indeed, my colleague David Stevenson is incredibly bullish on silver). But I don’t think we’re there yet. If a bear market has three phases, I’d say we’re in the final phase – but the bear still has some biting to do. Time will tell if I’m right or not.
This article first appeared at Moneyweek, the UK's best-selling financial magazine.