Bear Market or Bull Opportunity?

Bear Market or Bull OpportunityBears have had a number of reasons to stand tall lately since many recent developments that should have been bullish for gold haven’t been. But, even as prices have continued to fall, there are those who suggest that while bears may believe they are taking control, smart investors should be taking advantage of the opportunities.

Given the heightened levels of uncertainty and threat of turmoil in the Eurozone, gold should be raking in bundles of safe haven cash, but that isn’t happening. Instead, safety seekers are flocking to the dollar even as the US fails to harness its spending and its economic data loses some of the shine that was seen in the first quarter.

Followers of the market are well aware that gold had become addicted to loose monetary policy. The dependence has become so extreme that drastic price fluctuations can result from the mere suggestion of action or disappointment at the lack of such suggestions.

But this weekend, following weaker-than-expected data in April, which the markets interpreted as further proof of a slowdown, China slashed its reserve rate ratio. In doing so, banks, which now need to hold less cash, have more freedom to douse it on the public; however, the gold market has not taken notice.

“Welcome to the ‘new’ normal…where the perception that China is experiencing a worrisome deceleration supersedes the possible benefits of an accomodative stance by the government,” wrote Jon Nadler, Kitco Senior Metals Analyst.

India, which is a key market for gold, is displaying bearish attitudes through its lack of demand for the metal. The marriage and festive season has passed, international markets are sending negative cues about gold, and compounding these problems is the fact that even with falling prices the metal is still relatively expensive when purchased with volatile rupees. At R28,540 per 10 grams, an ounce of gold on Tuesday would cost over $1,650, about $100 more than in New York.

As if that isn’t enough ammunition for the bears, they can also celebrate the the gut-wrenching drop in gold prices.

Scotiabank said that while on the downside, it will become increasingly bullish as each support level is breached. Those levels, said the bank in its May metals report, are at $1,630, $1,623, $1,614, and $1,612. Gold has crashed through all of those levels, giving up all of its gains for the year. Tuesday, the metal hit the lowest levels seen since December 29.

Gold the commodity

Gold is now trading as a commodity. In this environment, bullish sentiment is drying up and fund managers have been exiting the market for weeks. Last month, gold Eagle sales saw a sharp decline. And last week Barclays Capital cut its forecast for gold by eight percent to $1,716, citing recent price declines and the slowdown in demand from India and China.

Though bearish tones may be growing louder, not everyone is convinced that gold is set to crash and burn. Nor is everyone ready to cash out and move to the sidelines.

Central banks are expected to stay in the market. Last year they purchased 440 tons of gold. Scotiabank is expecting this trend to continue as governments and sovereign wealth funds look to diversify away from fiat money.

“This should help to underpin confidence in bullion and in turn keep investor interest active, especially into price dips,” the bank said.

If central bankers’ attitudes are similar to those held last year, they should find the current price weakness very encouraging; in 2011 price declines often served as buying opportunities.

ETF investors, whether they are aware of it or not, are considered sticky money. In April, there was a trickle of outflows from these holdings. However, for the most part, ETF investors have lived up their moniker despite the downtrend of gold prices.

While it is certainly not an event worthy of champagne, investors added 2 tons to ETFs last week, which made them net buyers for the first time in a month. This occurrence came in the midst of a risk-off environment that by comparison saw silver ETF investors drop about 76 tons.

There is still a notable amount of optimism towards gold, though it may not get a lot of airtime at the moment.

Legendary investor Jim Rogers recently said that he is still bullish on gold, and that the the pullback in prices creates a value buying opportunity. A number of professional traders continue to hold their ground and see long-run opportunity in the market.

Even though Scotiabank noted that a fall below the aforementioned technical levels is bearish, it also added that moves below $1,550 may well turn into spikes.

“We believe that getting bearish on gold at current levels (c.$1,560) would be wrong and too late,” says a market note from Standard Bank. “In fact, we believe that from a risk/return perspective, gold should be bought, not sold, on dips lower than this.”

 

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.

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