My article yesterday on what we should do with our gold was basically as subscription to the old trading adage that negative price action on bullish news is a bearish signal for the market - in this case, the gold market. The argument is that, in spite of setting a high of over $1900 almost a year and a half ago and a continuation of both the economic and the fear conditions that would countenance a continuation of the rally, gold's sluggish retreat to $1650 portends a shakeout of weak long positions.
What are other observers saying? Is there any consensus regarding gold?
In a Bloomberg report, Tom Kendall of Credit Suisse said “the downside risks are building for gold” and "we think it highly likely that the market has already seen the absolute high. He further opined that "against any sensible benchmark gold still appears significantly overvalued relative to the long run historical experience.”
A SeekingAlpha newsletter describes the "drip-drip-drip erosion in gold prices" since the New Year as "the equivalent of Chinese Water Torture for gold bulls.” Blame is placed on the irresponsible policies of the Fed’s Ben Bernanke who futilely continues to use the only ammunition left to him: endless quantitative easing (QE) referred to as “perpetual QEternity” in the newsletter. Although theoretically this should be bullish for gold prices, it hasn't been and the author rationalizes the non-inflationary result of this increase in the money supply to a decrease in the velocity of money stocks. No wonder gold traders are so confused lately.
Britain's The Independent asks this about gold, "with everyone rushing into it, could it be forming a large bubble that bursts the moment interest rates rise and economic growth regains momentum?" They argue that "if all the big hedge fund investors pulled out, it would trigger a move down by a few hundred dollars, especially if there's an increase in interest rates and the equity market does really well."
What about the gold guys who profit from higher gold prices - what are they saying? Randgold's Mineweb page recently argued for higher prices based on, of all things, chart patterns. They quote analyst Jeff Nichols who sees a new gold rally based on a "feeling" that "gold is edging closer to an upside breakout after having built a good base of support in the $1650-$1690 range." They continue to say that Nichols "is convinced that sooner, rather than later, the price will push back through $1700 and create a new floor at that level." Do we really want to bet the ranch on that theory?
The Wall Street Journal's India edition quotes High Tech Strategist, Fred Hickey, as recommending investors to sell Apple stock (there's a crowd trade for you and didn't that train already leave the station?) and then buy ... gold! The TV gold hucksters are more believable than Fred.
So, what can the confused gold trader conclude from all this? One thing seems clear: there is no positive consensus on a continuing gold rally. Throwing out technical chart pattern analysis, which is usually the last refuge of a trader who is outside of every fundamental information loop, the key tangible indicator seems to be interest rates. If interest rates rise, gold prices are expected to fall. So there you have it; all you have to do is figure out what interest rates are going to do. Good luck with that.