How to View Gold and Why It Might Be Bottoming Now!

by Victor Sperandeo and The Curmudgeon


In a previous CURMUDGEON post - Q&A On Gold—Past, Present and Future, Victor and I expressed our view that Gold was money and should be considered as a long term investment for most individuals.  (For CTAs and managed futures funds, gold is a trade or long/short speculation).  We also examined gold market drivers and said that the cyclical bear market in gold had ended this past June with an intra-day print low of $1188.  We hinted that there was manipulation and control of the gold market and we still feel that's the case.  This article provides an update on our views on gold as well as those of several newsletter writers and analysts.  We also examine the current technical position of gold since its June 2014 intermediate low.  Victor's closing comments are especially relevant at this time.

Sperandeo views gold from a different point of view than most analysts. "Fundamentally, gold should be held as a part of an investment portfolio to hedge one's net worth against a "long tail" (unexpected negative) event and to protect against long term inflation."  Victor suggests 10-20% of a total portfolio being allocated to physical gold.  

Why shouldn't gold be a short or intermediate term trade?  It's because few people can make money doing trading gold.  Considering a variety of technical trading methodologies, Victor’s firms have extensively tested 214 different algorithms and found that only one was profitable trading gold since 1985!   [It's a simple long term 12 month Moving Average (MA) that's weighted 1.1 times.] As a result, he says that short term systematic trading in gold is a losing proposition for the majority of investors and speculators too.

What's Happened to the Gold price since June 2013?

Gold's rally off the June lows ($1188 intra-day and $1200 for spot gold close) was unsustainable and the yellow metal has retraced its rally that topped out at $1420 intra-day.  To date, spot gold and Feb 2014 Comex Gold futures have held above the psychologically important $1200 support level (with an intra-day print low of $1218).  Friday (December 6th) closing price for spot gold was $1230.$GOLD&p=D&b=5&g=0&i=0&r=1386592193877

The Curmudgeon believes gold's rally failure and subsequent selling is due to Exchange Traded Fund (ETF) liquidations (e.g. GLD, IAU, DGL, etc.) and short sales of those same ETFs as well as Comex Gold futures contracts.  The buying is coming from physical gold buyers (especially in Asia) and foreign central banks.

We believe the rising price of gold over the past decade had lured many "investors" (individuals, money managers, mutual funds and hedge funds) into the paper gold market through ETFs.   Those investors mostly viewed gold as an alternative to common stocks for short term capital appreciation, rather than for long-term capital preservation.  As a result, they sold their Gold ETFs which caused the spot price to drop.  By the end of September, gold ETFs had sold off about 700 metric tons of physical gold - more than half of it in just the second quarter of 2014. 

On December 6th, Bloomberg reported that "Investors cut holdings in exchange-traded products backed by gold every month this year as prices tumbled, erasing $69.4 billion. Some lost faith in the metal as a store of value as inflation failed to accelerate, while equities and the dollar rallied."

We think the gold ETF selling might be overdone. GLD - the largest volume Gold ETF-has consistently traded at a 3.5% to 4.5% DISCOUNT to spot gold during the recent price decline. That discount tends to narrow as the spot gold price increases.

Victor is cautiously optimistic that the $1200 support level for gold will hold.  "Using the long-term MA, gold is still bearish. So from a technical basis there is no evidence of a bullish reason to be long the yellow metal.  However, classical technical analysis suggests that gold will test the intermediate -term lows set on 6/8/13 at ~$1188 and make a (double) bottom around that level or higher.  But it is not there yet, so one must be cautious."

Sperandeo's View of Gold and Gold Miners:

Many (worldwide) gold mines will shut down if the price settles under $1200. The high cost producers will have to wait for prices to go up to make a profit.  Also, sovereign states will start to print money to buy gold.  In effect, they will take advantage of the current "low inflation, zero (or negligible) interest payment" time period to exchange paper money for real money (i.e. gold).

Why not? There is apparently no inflation? If I ran the printing press of a country, I would do this all day to buy real physical gold.  But not paper gold or futures contracts, unless I was planning to take delivery.


Victor's Chart Analysis:

World money supply is growing at 9.1 % compounded from August, 1971 - 2008 and probably 10.5% (estimated) from 2008 to the present.

The gold price has increased at an 8.6% annual rate (in US dollars) from 1971-to- November 29 2013.  So gold as real money is keeping up with inflated fiat currencies, especially the U.S. dollar.


CFTC Commitment of Commercial Traders report for Gold indicates they are the most net LONG in over five years!  Meanwhile, Large Speculators (chart not shown) continued to liquidate LONG gold positions and are now net SHORT for the first time in at least five years.   The CFTC reports that "Managed Money" added 6,072 new short gold contracts in the week ended December 3rd.

This is a sign that the bottom in gold is near.  Commercials won't sell at these low prices, while large specs are often a contrary indicator of market direction.


Other Views:

In his Dec 2013 Gold Letter, Peter Schiff wrote:

"By the end of September, gold ETFs had sold off about 700 metric tons of physical gold - more than half of it in just the second quarter. The World Gold Council reports that the majority of these outflows have been absorbed by Asian demand."

"Western selling was enough to keep the global spot price from recovering. Instead of more capital flowing into gold, it was the gold itself which was flowing from Western financial institutions to Eastern households."

"The latest data shows that consumer demand for physical gold in the first three quarters of 2013 hit a historical record of 2,896.5 metric tons. 90% of the year-over-year increase in this demand came from Asia and the Middle East."

In his latest Commodity Futures Forecast report, Philip Gotthelf wrote:

"Sovereign (states) accumulation is more likely to play the pivotal role in determining the net outcome from ETF liquidations and private sector abandonment."

"Here is another reason gold is not likely to fall completely out of favor. Aside from fancy color diamonds, there are no wealth preservation assets that work in the Middle East. We may feel comfortable within the security of the United States. Trust me… if you’re a citizen of any Middle Eastern country you do not have any sense of security… physical or monetary."

Commerzbank’s commodity strategists:

"The impetus for an increase in the gold price will probably have to come from speculative financial investors. These investors were also the first to start scaling back their bets about rising prices in summer 2011 shortly before the all-time high was reached, thus heralding the end of the upward surge. The chances of this group of investors returning to the market next year are good. Speculative financial investors have now largely exited the gold market, as evident from the fact that net long positions are at a 7-year low[.] The negative market sentiment towards gold is also reflected in negative media reports and for the most part pessimistic price forecasts. All of this may indicate a rapid reversal of the trend. After the price has successfully bottomed out, gold ETFs should report inflows again from the second quarter, supporting the price recovery."

Nicholas Larkin of Bloomberg:

"Gold analysts are bearish for a third week, the longest stretch since February 2010, as prices approach $1,200 an ounce and a stronger U.S. economy improves the chance that the Federal Reserve will reduce fiscal stimulus.  Sixteen analysts surveyed by Bloomberg News expect gold to fall next week, 11 are bullish and two neutral. Prices tumbled 26 percent this year, heading for the first annual drop in 13 years and the biggest in more than three decades. Bullion last traded below $1,200 on June 28th."

Dennis Gartman of the Gartman Letter:

"We remain long of gold in Yen terms and that is the only way we shall buy gold at this time, happier to note that we are joined in this trade by Mr. Kyle Bass of Hayman Capital Management who has gone out of his way to say that Gold/Yen is the trade he will most strongly support going into 2014."

Enis Tanner of

“I'm bullish after that reversal, especially since the initial reaction was lower, but did not breach recent lows. The chart looks like a double bottom.”

Brian Sullivan of CNBC News in a video interview with two analysts:  


Victor's Closing Comments:

First and foremost, gold should be thought of as real money.  As "JP Morgan" said before Congress in 1913, "gold is money - nothing else." 

Both gold and silver have kept pace with inflation over the last 100 years.  That's since the creation of the Federal Reserve System in 1913.  Meanwhile, paper money (US dollar/reserve notes) has declined 96.25% in real purchasing power.  Or put another way, what cost $100 in 1913 now costs $2,402.11. 

From August 15, 1971 (when Richard Nixon took the U.S. off the gold standard) until gold's peak price in September 2011, the yellow metal compounded at a 10.23% annual rate.  Compare that to the S&P 500, which has compounded at 9.9% (including dividends) over the same time period.



1.      The last 100 years of inflation: CPI 1/1 /1913 index 9.8 to 10/31/2013 234.877 +3.23% (Source: BLS).   

2.      Gold's average price $18.92 in 1913 (Source: World Gold Council) vs. $1230 on December 6, 2013 (Comex Feb 2014 futures), produces a +4.27% annual return.

3.      Silver was 61.24 cents in 1913 (Source: 1913 The Silver Situation BLS) vs. $19.40 on December 6, 2013 (Comex March futures), produces a +3.52% annual return.

4.      Nixon made the decision to end dollar convertibility to gold, because the U.S. was running out of the necessary gold to back all the dollars it had printed.  And that was four decades before the Fed's QE programs and quadrupling of its balance sheet!


If the long term strategy of buy low /sell high is still relevant (or is it buy high and sell higher?), it’s now time to consider accumulating gold for the long run.  Again, we don't recommend gold as a trade or speculation for serious investors.


Till next time........................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1979) to profit in the ever changing and arcane world of markets, economies and government policies.  As President and CEO of Alpha Financial Technologies LLC, Sperandeo overseas the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.