OMG: Oh my, Gold!That sure didn't take long. Gold pulls back to $1,500 and we're already asking whether it is a bubble on the verge of popping.
Compared to other assets, gold isn't too bubblicious. But that sure doesn't mean price cannot drop significantly. This morning I listened to a Reuters interview with two commodities analysts discussing their individual outlook for gold - one a bull, one a bear.
The bear led things off, citing what might change among the major drivers of gold prices. He correctly listed what I would say as the three main drivers: US dollar via low interest rates, quantitative easing, and demand from emerging market central banks due to swelling surpluses in their capital and trade accounts. Naturally, if these trends change direction then gold's appeal likely changes too.
The bull cited all the same reasons, naturally, as justification for a continued climb in the price of gold.
And there it is: choosing between two extremes.
The bull didn't offer an up-side price target for gold ... only that he feels nothing has changed to stop it from running higher.
The bear offered up $750 an ounce as his downside target.
Whoa ... wait a second. Gold down to $750? That's more than 50% off current levels. [Perhaps unrelated, but there is also something else currently going for 50% off that you might want to check out when you have a free moment.]
Back to gold - could that analyst be anywhere in the ballpark calling for a move down to $750?
Yes. Sure.
But the bullish analyst sticking to his guns has a point - what has changed besides perhaps investor sentiment?
Yes, I know sentiment can influence fundamentals, etc etc ... but quantitative easing is still in play and we don't yet know what the Federal Reserve has up its sleeve if the US economy is not hitting its growth in stride once QE2 expires; plus, the US dollar remains the funding currency of choice in what has become a very speculative trend for asset markets.
If anything, gold is tied to a general distaste for fiat currencies and should remain supported if developed market central banks don't adopt a monetary-policy-normalization mindset - a lid remains on US interest rates; and there are some serious threats being tossed around the eurozone that could quickly undermine the euro.
This morning a reader of ours passed along his technical outlooks for the US dollar and gold. As he noted, his outlook for gold is almost perfectly dependent upon his outlook for the US dollar. And for whatever reason, he sees the US dollar index running to about 107 by the first quarter of next year. As for gold, he would then expect a corresponding move to $500 an ounce.
Yes, you read that correctly.
But I don't necessarily think the US dollar and gold will be a perfect inverse trade, in the way the US dollar and the euro are nearly perfectly negatively correlated. That means $500 an ounce certainly is not on my radar screen right now even if something drastic changes in the eurozone that kills the euro and supports the US dollar.
But I realize I am just splitting hairs here. Right now, if I had to pick an extreme, I still side with the bullish arguments favoring gold and many other commodities. An old market adage goes something like this, "Sell when everyone else is buying, and buy when everyone else is selling."
Everyone was selling last week. Perhaps it is time to buy.
But one thing is for sure - this is a time to keep your exposure and leverage in check.
Have a great week.
Author:Jack Crooks, He is Black Swan Capital LLC, President and Chief Trading Officer.
“small step for man”