-- Published: Monday, 2 March 2015 | Print | Disqus
GOLD MARKET Flash Note
The latest Commitment of Traders report shows that large speculators in the managed money category have got their positions down to a point where we could now see a bounce in the gold price. In our last Flash Note, we forecast a dip in the price needed to reduce these longs and that appears to be close to done.
Meanwhile, the financial and economic issues that support an increased perception of risk for financial assets and (therefore) a higher gold price have moved higher, from Greece and the Ukraine in geopolitical terms to US economic performance. We continue to think that a sustained move higher in gold (not just a bounce) is most likely to be triggered by a “surprise” failure of the US economy growth narrative, leading to a stock market decline, a Fed policy reversal (back to easing) and a resulting loss of confidence in the Fed, the dollar and future profitability.
The facts are there for a change in the narrative. GDP growth last year was slower than 2013—not the stuff of a recovery reaching much-expected “escape velocity”. A lot of the growth in 2014 was from a massive build-up of inventories which will soon have to be reversed.
Capital spending is declining, reflecting extreme weakness in oil & gas drilling, which was the driving force in manufacturing over the last four years. Corporations are not investing; they are goosing their stock prices to new highs through debt-financed share buy-backs and other financial engineering.
Corporate profits from the Bureau of Economic Analysis numbers using data from the Internal Revenue Service show year over year declines in each of the first three quarters of last year (4Q is not yet available). In the third quarter, after-tax profits adjusted for changes in inventories and depreciation were 7% below a year ago. Current projections for the S&P500 predict that sales will actually fall in 2015 from last year’s levels.
The depressed gold price is, in our view, part of a tightly-wound set of assumptions in which the cornerstones are accelerating US growth, Fed normalization of monetary policy and a rising dollar—all considered to be gold negative. Without these assumptions, there is no bear case for gold.
If the economic data continues to weaken, we may be only a few months away from a major turn in gold. February's Chicago Business Outlook (formerly PMI) unexpectedly crashed to 45.9, its lowest level since July 2009, missing expectations of 57.5. This is the biggest month over month drop since Lehman in October 2008. New Orders suffered the largest monthly decline on record. Apologists blame the weather and Pacific port closures but did the two dozen economists who were so completely wrong in their expectations not know about the strikes or the cold winter? Nearly 90% of all the data released in February failed to meet expectations (see below). Is this becoming a trend?
Meanwhile, we look for a short-term rally in gold and gold stocks.
Jim Anthony is a private investor who trades for his own accounts. He co-founded Seabridge Gold and has helped to finance and advise a number of junior gold producers and exploration companies over the past 30 years. His gold market commentaries have been published by Seabridge since 2000. Originally a student of economics, Mr. Anthony has become a disciple of markets: "The tape can tell you much more than any economic model." He is not a registered investment advisor and his opinions expressed above are not intended as investment advice.
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-- Published: Monday, 2 March 2015 | E-Mail | Print | Source: GoldSeek.com