Gold Against The World

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The mantra of a good investment, like the mantra of a good sports team, is that you win some and you lose some.  Unfortunately for gold investors, "lose some" appears to be the defining characteristic of the precious metal.  To say that gold has taken it on the chin in the month of July would be an insult to chins.  The most precious of all precious metals fell to five-year lows, with a ten-day streak of lost value that represents the worst losing streak for gold since 1996 -- back when you could be reading this web page on Netscape Navigator.  With experts saying that the worst for gold remains yet to come, what should investors know about this poor run of luck, and does buying low represent a sound strategy in the near future?

Tipping Points

Some financial crises have no spark to signal the onslaught.  Others, however, can be pinpointed down to the very second.  Just as the Great Depression began on Black Tuesday, October 29th of 1929, so too can we point to the fall of gold on June 20th at just after midnight eastern time, when Asian trade on the Shanghai market saw no less than half a billion dollars of gold dumped onto the market in exactly four seconds.  This major shift sent the price of gold into a hole that it has yet to recover from as stop-loss orders flooded the market on every side of the world, from Shanghai to London to New York City, pushing gold well below $1100 an ounce to hit the worst valley the metal has seen in half a decade.  ScotiaMocatta believes that gold has to climb above $1133 in order to stabilize; anything less and the metal cannot retain buoyancy in a market that's got far more sellers than buyers.  About the only good news out of the entire debacle came from those who had the unique opportunity to buy gold at a low price: July sales of bullion coins from the United States Treasury shot up to the highest point in two years.  SPDR Gold Shares, the world's largest gold-backed exchange traded fund, noted that their reserves had dropped by half since 2012 as fewer and fewer buyers emerge from the woodwork in search of metals.  The total market's holdings of gold-backed ETFs has fallen by over thirty percent in 2015 with no end in sight.

Currency Capabilities

The strong performance of the US dollar has only so far before it will run into the Federal Reserve's interest policy designed to keep the lending cycle up and running.  Between now and then, however, currency bulls can gorge on a stronger dollar at a time when the Euro experiences its worst crisis in history, the pound sterling has had just a few good weeks in the past calendar year, the yuan suffers from a downright crippling stock market, the yen refuses to budge, and the Swiss franc's de-listing from the Euro has made investors keep their distance.  Predictions that commodities have reached the end of a "super cycle" need not be backed up with lots of economic data: you need only look at the nearest gas station to see how the downward spiral of crude has impacted the average American, or read about how steel plants have to lay off workers since nobody wants to buy their product.  Gold serves as the lynchpin of the global economy, meaning that the aggregate bad news in tandem with lots of good news for the dollar weighs heavily upon the metal.  Only corn and silver have dropped more than gold this year, indicating that the gold bulls, if any still can be found, have gone into hiding for as long as this rainy day will last.

Going Up Or Coming Down?

Have we reached the point of gold's nadir?  Has the metal endured enough beatings to go back about its daily business?  It's tempting to say yes, but impatience is rarely rewarded in the investment world.  Gold likely cannot fall further than $1000 per ounce, and not just because it's a nice round number in base ten.  Gold never climbed above the one-thousand-dollar threshold during either 2008 or 2009, during the very worst of the recession, suggesting the upward limit of gold in times of currency anxiety and thus dictating the lower limit of gold in times of currency bravery.  Ironically, the best gage of gold may not be gold itself.  Instead, the growth of the dollar index may provide the necessary clues to see how far the lower limit can be tested by the commodities market.  The US dollar index only surged above 100.00 once in 2015, touching the high point before falling back down to the mid-90s.  The dollar, however, is currently on an upward swing that deserves quite a bit of blame for forcing gold downward.  The dollar index could quite likely push past 100 in the immediate future given the strength of most hiring data of the past six months, but pushing past it for an extended period of time would require significant quantities of good luck (or bad luck, depending on how you view it).  That means gold's stabilization ought to lie just around the corner if the dollar hits its peak value prior to the interest rate hike. 

Where Do We Go From Here

  • Only buy gold -- bullion, ETFs, mining stocks, or coins -- if you have the time to see it grow.  Shift your investment money to currencies if you do not.
  • Gold likely has not hit its low point and the most pessimistic of analysts say it could drop as low as $800.  While unlikely, investors who are bullish on gold have no reason to purchase at the moment.  Gold will almost certainly decline through 2015, especially with an interest rate hike.  Consider buying low at the end of the year.
  • Short of an absolutely dire liquidity emergency, no investor should sell gold holdings at the moment, though short-selling gold will likely provide good value going into autumn and even winter -- provided you can find a party who will buy at above $1100 an ounce for the pure play.

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