Questioning The Gold Bull

by Inya Ivkovic, MA

Dennis Gartman, author of “The Gartman Letter,” has long been skeptical about the gold bull, perhaps now more than ever, as gold futures have crept up above $1,000 per ounce for the third time in the past 18 months. The question on everyone’s minds is whether gold has plateaued and whether the next move could be just another disappointing bust. Historically, whenever there was too much interest in gold, futures prices would almost inevitably turn southbound. On the other hand, inflation concerns and a weak dollar have been gold’s traditional confidence boosters. So, who is right and which way could gold prices turn in the near future?

Not surprisingly, gold bugs insist that the price of gold will only keep going up, as the bullion approaches the $1,000-per-ounce mark. Some are vocal enough to scream down the Street that gold will hit amazing levels of $5,000 per ounce. Why else would the life-long gold hedger, Barrick Gold Corp., after so many false promises, finally announce the unwinding of its hedge book? The world’s largest gold producer must have realized that this could be its last chance of getting a piece of gold’s price bonanza pie.

To this I only have to say the following: no one can successfully time or divine the market or, in the case of gold, predict with any degree of precision where inflation is going and how the dollar will perform in the near and longer terms. Additionally, the fact remains that, in the past 18 months, gold futures have taken a stab at the $1,000-per-ounce mark three times, failing to break through it each time and losing some ground in the process, too. There are also market observers who predict that what has fuelled gold prices as of late — that is, world central banks’ concerted efforts to keep the liquidity taps flowing — may no longer be there, or at least not at the same level of intensity.

Finally, there are even those among gold bugs who feel that their camp is getting overcrowded. Mainstream investors have been buying gold en masse ever since the credit and financial crisis hit, as their excitement about gold was fed by their fear of volatility and a global economic downturn. But some may be thinking now that they could have overacted just a bit and might decide to decrease their exposure to gold, which, if it happens on a more voluminous level, could push the price of gold further down.

What is the sentiment towards gold in the market? According to the Commodity Futures Trading Commission’s recent weekly data, total outstanding futures contracts in gold and their prices have been increasing steadily. But, by the same token, contracts held by speculators that are often perceived as the best gauge of the investment sentiment (e.g. institutional investors that do not take deliveries of gold), have been betting increasingly on gold prices going south. Note that their short vs. long positions have hit a seriously bearish 9-to-1 ratio, which means that bear bets outnumber bull bets nine to one.

That said; note that sentiment-type indices, those that track gold recommendations among ordinary investors, while stopping short of ringing endorsements, indicate that modest, yet bullish sentiment towards gold prices remains. So, while gold experts appear to be less enthused about the direction of gold prices, ordinary investors like it that much more. Most contrarians would take this gap as a sign to listen to the latter group and expect gold prices to continue increasing.

What do I think? Bear in mind, this is one person’s opinion only, but, for what it’s worth, I believe that gold’s fundamentals remain strong and will continue to support the bullion’s upward momentum. By “gold fundamentals” I mean the global macroeconomic environment, which works for gold either way. How so? If the world’s central banks close their liquidity taps, the massive amounts of money that are already in the financial systems will likely generate inflation, (potentially even hyper-inflation), which will force interest rates to go up and currencies to weaken, sending panicked investors back to gold as the traditional safe haven. And even if the liquidity taps were to stay open, they cannot remain so for very much longer. All those budget deficits, particularly in the U.S., will have to be deleveraged one way or the other, neither of which will be pleasant and either of which will likely push prices of gold up.

In the short term, however, all this panicky talk about gold bubble bursting is bound to get speculators and institutions out of gold (I cannot ignore the fact that there are currently nine short contracts for every long one), which is, in turn, bound to push gold prices down. But I don’t believe that, if gold prices were to go down, they would do so by hurling themselves off a cliff and into the abyss. If the pullback comes, I expect it to be a healthy correction under the $1,000 mark, but not below $900.00 per ounce. And once speculators unwind their short positions, gold prices will be ready to start rising again. In other words, if the pullback in gold occurs in the short term, I would consider it a signal to buy more gold.