Gold: Setting Up For Another Fall

September 13, 2014 Updated: April 23, 2016

In the final months of 2013, I issued multiple warnings for those bullish on precious metals and their ETFs: here, here, here, and here, until prices finally reached my proposed bearish target here. What was most surprising about the series was the fact that there was almost nothing that could be done to convince gold bulls that prices would fall — even as they continued to plummet. Of course, gold markets closed 2013 in negative territory for the first time in more than a decade. The SPDR Gold Trust ETF (NYSEARCA:GLD) closed just above the 115 target that I initially outlined. Sometimes I wondered if these naysayers even had access to accurate chart data.

If nothing else, the time and effort spent on these articles provided a lesson in the various ways gold bulls will ignore facts, twist arguments, and exercise the belief that simply wishing prices higher will help to reverse earlier losses. Of course, the market will never come to you. Any consistent investment strategy requires the ability to trade markets for what they are — and not what we hope they will be. Unfortunately, investment losses tend to create emotional reactions and delusional responses to facts that are abundantly obvious to those without negative exposure. So, we can’t exactly say that any of this was really a major surprise.

Fed Finally Takes a Stance

Most of my arguments have been based on the misunderstood view of the economy that is typically held by those bullish on precious metals, and the fact that tapering in quantitative easing programs would be happening sooner rather than later:

“The real driver here is the market’s reaction to changing expectations in the Dollar and the apparent [emphasis added] reluctance at the Fed to put its “money where its mouth is,” and actually commit to an exit strategy. An end to quantitative easing stimulus is inevitable, and if we see a stronger than expected performance in fourth quarter GDP in the US, markets will again be forced to position for that inevitability.”

This was written toward the end of October 2013, just after the market received its “no change” surprise at the September FOMC meeting. This period was also marked by a sweeping belief that QE would continue forever, the value of the U.S. Dollar would crash to nothing, and that the economy would never be able to stand on its own without the constant aid of central bank stimulus. If this sounds like I am exaggerating, read the comments in the articles cited above. None of this has come to fruition, and it is time for investors in precious metals to start looking at reality rather than holding onto positions for too long and then justifying those decisions with conspiracy theories.

Now that the Fed has opted to reduce monthly asset purchases on two separate occasions — even in the face of weakening employment data — it is important for investors to start thinking about the long-term, rather than what might be happening in today’s Yellen comments.

Headline results in Non Farm Payrolls have started to weaken for the last two months. But the latest unemployment rate numbers have fallen to 6.6%, which is very close to the 6.5% “line in the sand” that was originally suggested by Ben Bernanke. We can make any argument we want about the relationship between the Non Farm Payrolls and the jobless rate, but the fact is that the Fed has set a clear target and we are likely to see them act on those intentions. The end of Fed stimulus means a higher U.S. Dollar, as there will be fewer Dollars running through the system. For those holding GLD, this is a flashing red light on your car dashboard telling you your brakes have given out. Precious metals markets are just setting up for another crash.

Chart Perspective: GLD

Epoch Times Photo

GLD Chart Source: Yahoo! Finance

In my last article, I recommended closing short positions in GLD. But this had nothing to do with the belief that we are in the early stages of a bull market. The declines into the end of last year were drastic, and extreme market activity like that (in any direction) means its time to reconsider your decisions. From a chart standpoint, the upside break of 1270 is important and suggests we have not yet reached a peak. The longer-term perspective, however, shows that it is just a matter of time before new sells kick-in.