A look at the spot market for gold will show that prices have fallen over the past month and indeed over the past few years from its 2011 peak. Early in February gold sold for $1,680 an ounce; by Friday, February 22 gold had fell to $1,581.40. Gold hit a 7-month low on February 20; analysts are beginning to refer to gold’s “death cross,” which Investopedia defines as “a crossover resulting from a security’s long-term moving average breaking above its short-term moving average or support level.” Since long-term indicators are more significant, the trend denotes an approaching bear market. High trading volumes serve to bolster market direction.
The price of gold has fallen over 12% or $200 since early October. Previously, gold occupied “death cross” territory in April 2012 when prices sank 8% from their most recent high and gold lost another 6% before trending higher out of the death cross.
The prevailing wisdom is that investors look to gold in times of economic turmoil and as a bulwark against inflation. Gold’s latest drop is indicative of investor optimism in the growth of global economies. Thus, many are turning to riskier investments such as stocks. Some market pundits are predicting that gold could drop to $1,525 – one Australian seer predicts a low of $1,400.
Since gold’s latest nadir on Wednesday, as mentioned above, its price has nudged upward. However, underlying economic realities remain unchanged. In particular, with the amount of money the Federal Reserve is printing, inflation is sure to rise.
Perhaps the most unusual anomaly in gold markets is this fact: for the past 12 years, gold has not seen a down year. In other words, the price has been higher than the year before. Demand drives markets and the demand from Asian nations such as China and India, central banks, investors and the jewelry industry has not abated.
Commodities expert Dr. Alex Cowie of the magazine ‘Diggers and Drillers’ cites the Gold Forward Offered rate (GOFO) as an indicator of the coming rise in gold prices. GOFO measures market liquidity. As seen above, gold has hit a multi-year low. But over the past five years, the one-month GOFO has consistently heralded a significant upward move in gold. Of paramount importance is the correlation between the rise in gold prices and the over-performance of gold equities. If Cowie is right – and he has a good track record – gold looks to overtake its 2011 peak.
No one knows where the exact bottom of gold’s latest downward trend may be. It could have been earlier this week. But if you trust your instincts regarding basic market and governmental policy truths, stick to your guns regarding the long-term future of gold. Remember the old chestnut of investing: “Nothing goes up in a straight line.”