Gold Prices Have Investors Confused

Confusion and indecision have been the general mood in the gold arena lately, with analysts and investors alike pivoting their positions from bearish to bullish and back again on almost any piece of news.

After falling over $20 from $1,236 to $1,213 in the half hour leading up to Friday morning’s November employment report, gold mounted a brisk $30 rally back up to $1,242 in the first half hour after the data. Changing their minds yet again, traders then sold the metal back down to the low $1,220s before finishing in the middle of the week’s range at about $1,230.

Just what were gold traders thinking? “I think it’s just market positioning,” Jim Iuorio of TJM Institutional Services gave his assessment of gold’s volatility to CNBC. “Right around the [time of the jobs] number, people all pull their bids and offers, so it can all get shoved around quite easily. You’ve got to let it settle down first to figure out what’s really going on.”

Now that we’ve given it time to settle, what’s next for gold? Where will it likely end this first losing year out of twelve? And what might next year have in store?

Gold’s Allergic Reaction to Strong Data

While experts from investment bankers to futures traders to technical analysts polled in Kitco News’ Gold Survey are evenly divided over gold’s performance next week – 7 up, 7 down, and 5 sideways – gold seems resolved to uphold 2013’s downtrend right into the close of the year.

For a fifth straight week, gold fund managers have continued reducing their long positions and adding to their shorts, which rose to their highest level since July.

“The shorts are still in control even though we have seen some vicious short-covering rallies,” president of Phoenix Futures and Options, Kevin Grady, explained to Forbes. “We are seeing some strong economic data lately and I think that will add to the pressure in gold.”

More of that strong data came Friday morning when the Bureau of Labor Statistics reported 203,000 new non-farm jobs were created in November, with a higher participation rate pushing unemployment down 0.3% to 7%, all numbers coming in higher than anticipated. That represents yet another green light for the Federal Reserve to go ahead with stimulus reductions.

“U.S. growth seems to be gathering momentum,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, confirmed to Bloomberg. “Gold has been suffering again lately as taper talk and a friendly risk environment have provided better investment opportunities elsewhere” – namely equities.

While few expect the Federal Reserve to announce the tapering of its monthly bond purchases at its upcoming meeting later this month, yet another strong jobs report certainly raises the expectation for a reduction in the spring. This is bullish for the U.S. dollar, which “may have begun a multi-year bull market,” Bloomberg cites Credit Suisse Group’s report released last Wednesday. And while less stimulus strengthens the dollar, it weakens gold.

Friday’s Jitters May Signal Transition

But while that explains gold’s downtrend all year long on consistently upbeat data, Friday’s sharp jump higher in the first half hour after the employment report’s release took many by surprise.

“This is a number that constitutes more taper talk, and it should weigh heavy on gold,” Iuorio expects going forward. But that wasn’t the case when the report came out. Despite the report’s clear indication that Fed stimulus tapering is more assured than ever, both equities and gold rallied on the news.

Perhaps that multi-week high of short positions might have something to do with it, as any upward move can trigger a cascading effect of covering, which may not be over just yet.

“I look for gold to have a short-covering rally in its near-term future,” Ken Morrison, founder and editor of the Morrison on the Markets newsletter, predicted to Forbes. “I expect a $1,265 upside target during the week ahead.”

Could it be that the bears are getting nervous? Do they perhaps sense gold’s downward slide is nearing its end? We just might be approaching a pivot point, that momentous event when a long awaited news item finally breaks and triggers the transition from “sell on the rumor” to “buy on the news.” That news item is the Federal Reserve’s announcement of tapering.

Gold’s Final Barrier is Soon to Fall

Ever since Federal Reserve Chairman Bernanke first hinted at a tapering back in May, gold traders have been trading gold down further and further in anticipation of it.

Of the $700 that gold has lost during the 2-year correction from its all-time high of $1,930 to last week’s $1,230, some $275 of that loss (nearly 40% of the entire correction) has come since that May 1^st Bernanke hint. Do we see how impacting the expectation of tapering has been on the gold price?

But let us think about what comes afterward. Once tapering is announced, there is nothing left behind it to stand in gold’s way. Behind that tapering event, the road ahead is clear for inflation to rise and gold along with it for at least two full years until interest rates begin rising in 2016.

While the initial reaction to the tapering announcement will quite likely be met with a sell-off in equities, gold has already had its correction – surpassing 36% off of its September 2011 all-time high. Once we get past the Fed’s tapering announcement (likely at the end of Q1), there will be nothing holding gold back, and everyone from traders to analysts will have to reassess their gold projections going forward.

Low interest rates for an extended period of time are on the Federal Reserve’s long term agenda, designed to stoke inflation to as much as 2.5%. We can expect downward pressure on the dollar and an upward lift under gold to resume just as soon as we cross over to the other side of tapering.

The shorts may be holding on for one last bout of selling to close out 2013 as the first losing year for gold since the multi-year rally began in 2001. And we may yet retest the summer low of $1,180, from which gold is currently not far.

But when the Fed’s tapering announcement is delivered, look for the tables to turn completely around for the dollar, equities, and gold in a hurry – triggering a short covering rally in gold, the likes of which have not been seen since the close of 2008’s correction.

Joseph Cafariello

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