Is gold hustling for a move?

Gold investors have had to endure quite a lot in the last six months. Not only has the gold price barely moved from six months ago, but it has endured an up, down, up, down chopping motion during this period of volatility. Future volatility in the gold price was something that some investors were calling for at the beginning of 2011, and volatility we got. During the last six months, this most psychological of markets, has endured all sorts of emotional squeezes, take downs and Buffett’s now regular wise cracks.

We read last week that sentiment indicators for gold investors where relatively very low. Apparently, fewer investors believed in gold than at any time during 2009 and 2010. Jason Goepfert, ofSentimenTrader, found that gold was less popular with investors now than at all other times since the Credit Crunch, apart from late 2008, and a short moment at the end of 2011. Mr Goepfert tells us that gold was also equally as unpopular on two occasions in 2011.

Sentiment in gold is very low

What is interesting about these bearish sentiment levels in gold, is that often they are preparation for a bullish move. John Embry often comments that these are fantastic opportunities for investors to enter the gold bull market, or add more to their gold bullion holdings.

When analysing the data from Jason Goepfert, Dr. Steve Sjuggerud reminds us how these sentiment levels have rewarded investors in the past:

 Back in late 2008, gold was more hated than it is today. What happened next? Gold rocketed from $750 an ounce to $1,000 in three months.

 Gold was also MUCH more hated than it is today for a brief moment a couple months ago – at the end of 2011. And once again, gold soared a couple hundred dollars, trough to peak, in a couple months.

Gold was EQUALLY as hated as it is today twice in 2011: at the end of the second quarter and at the end of the third quarter. In both cases, gold managed to soar by a couple hundred dollars, trough to peak.

 Gold was NOT QUITE as hated – but still hated – around the end of the first quarter and second quarter of 2010. Once again, gold did well, rising a couple hundred dollars, trough to peak.

Could gold be coiled ready to run up a few hundred dollars? Unless you believe the fundamentals behind this bull market have dissipated past data points suggest this is possible. Whilst we are cautious of measuring the past to predict the future, a number of notable gold investors are calling for gold price appreciation into the early summer.

The ‘managed’ gold market

Another phenomenon gold investors have had to endure is being invested in what has regularly been termed a ‘managed market’. What these commentators mean is that gold investors are participants in a very political market; gold is the unpleasant truth for those that benefit from easy money and financial irresponsibility.

Gold investors suffered their most recent dose of this pain during Ben Bernanke’s address to the nation at the beginning of March. During Bernanke’s half hour speech the gold and silver market’s experienced huge falls in what appeared highly unnatural market movements.

The reason such potential management of the precious metal prices is apparently possible is due to the concentration of market presence in the hands of a few larges traders. In his Gold and Silver Daily, Ed Steer reports that in silver the four largest “commercial traders/bullion banks are short a bit more than 43% of the entire Comex futures market in silver.  That’s preposterous!” Mr Steer also reports that for gold the largest four “commercial traders/bullion banks are short 28.4% of the entire Comex futures market in gold.  That’s equally as preposterous.”

A look at Nick Laird’s up-to-date ”Days of World Production to Cover Short Contract” chart, now famous in the precious metals markets, adds weight to this story of gold and silver price manipulation. Note how gold and silver are held in concentration compared to other commodity markets.

Nonetheless, this activity in the precious metals market has been occurring during many years of generally rising prices so investors should not lose sleep about it. It can be described as short term noise and bluster, which is actually an opportunity for strong hands to buy more. As James Turkdescribes it, “this is a managed retreat by the authorities”.

Holding a cork underwater

Managed though the gold market may be, the market cannot be held forever. The London Gold Poolfailed, and so will this less publically admitted meddling.

The aforementioned Nick Laird’s gold oscillator is indicating that this latest move in the gold price is a run to higher levels and possibly new price discovery. “There is good probability that gold has finished its decline and the next wave should be up and taking out the recent highs at $1,780.”

“On a larger scale, the impending move up – if it is strong enough i.e.. takes out $1,800 & then $1,900 – will then trigger a massive rise out of the triangle shown in the chart below. This is indicative of a major rise coming in gold – something strong enough to take us up to the mid $2,000′s.”

“The first rise up off the bottom was from $1,520 to $1,790 – a rise of 270 or 17.7%.  We are now down at the retest level and should move up from here so a 270 rise up from $1,640 will take us up to $1,910. We will in all probability see a larger rise here i.e. larger than 18%.”

Hold onto gold

As we enter the spring systemic and geo-political risk is still heightened, even if the European situation has been temporarily sated by the sugar-rush of the ECB’s LTRO money. The diplomatic tensions focused on Iran are still tightening. The finances of leading Western nations are still deteriorating whilst Obama, Geithner, Cameron, Osborne et al disseminate their marketing spin. As Doug Casey has joked, “black swans the size of pteranodons are circling in squadron strength”. There is plenty of potential for further crisis and gold remains a vital portfolio allocation.

A number of high profile gold analysts are calling for short term price rises into the summer, and although we are cautious in entertaining short term market calls within such a political market, their records combined with the technical indicators deserve some investor attention. There is plenty of potential fuel under the gold price, whether it rewards us sooner rather than later.

About the Author

Will BancroftAside from being COO, Will also contributes to The Real Asset Company’s Research Desk. His passion for financial markets and investment led him to develop a keen interest in monetary economics, gold and silver. Will’s views are sought by and appear on sites such as Seeking Alpha, Market Oracle, Stockopedia, Resource Investor, and Commodity Online. Will holds a BSc Econ Politics from Cardiff University.View all posts by Will Bancroft →