Andy Schectman: Gold Price is Misdirection — What to Watch Instead

The gold price took a hit this week, dropping below the US$4,000 per ounce level.

Silver fared much the same, slipping under US$60 per ounce.

Both precious metals were under pressure as conflict in the Middle East ramped up, reigniting worries about higher prices and interest rate hikes from the US Federal Reserve.

The rise in inflation concerns comes after cooler-than-expected US consumer (CPI) and producer price index numbers. However, any optimism was quickly quashed by new Fed Chair Kevin Warsh, who said in his first Congressional testimony that there's still "plenty of work to do."

Taking a step back from day-to-day price action, I've just returned from the Rule Symposium and want to highlight a few of my key takeaways about the outlook for gold and silver.

Starting with prices, many of the experts I heard from were clear that gold and silver can still potentially go lower than where they are now, at least to some degree.

The broad consensus was that gold isn't likely to go below US$3,400 to US$3,500, while US$50 is probably the floor for silver — although its volatility means that's not guaranteed.

Here's Dana Samuelson of American Gold Exchange explaining the downside for gold:

"Gold went from US$3,400 to US$3,950 very quickly last spring into the summer, if I remember correctly — or in the fall. It moved really fast, and then we moved all the way to US$5,400. On the way down we've backfilled a lot of the space between US$5,400 and now US$4,000, but there's an air gap between US$3,950 and US$3,400.

"If we break US$3,950, we could trade in the US$3,400, US$3,450 to US$3,950 range and backfill that. That is where I think the potential liability is for gold right now."

In terms of silver, Tavi Costa of Azuria Capital said the US$50 level may or may not hold:

"I think everybody that has a chart on their screen will see that there is a very important support at US$50. I would say, with a lot of experience looking at this market, I think that the metal does not like to respect these things very much. I've seen it break it or not go there many times."

Costa also touched on another prominent theme at the Rule Symposium, which was that finding a price bottom is a process, not necessarily a single moment:

"People come up and say, 'I'm not touching silver until it hits US$50.' And that's not how you should approach it, because it's not true that it's going to reach US$50 and then find a bottom. That's not true at all. It could go to US$45 — I don't know.

"The only way you do it, in my view, is that bottoms are a process. You hold some cash, and you keep deploying gradually until you — if you think that we're going to go to US$120, US$130, US$150, who cares if you bought it at US$50 or at US$60. But you will care if you missed it, and you didn't buy enough, because it didn't hit US$50, and it bottomed at US$60 or US$55."

Rich Checkan of Asset Strategies International emphasized that idea as well, suggesting that it makes more sense to dollar cost average down than to wait for the perfect time to buy:

"We know that gold dropped US$1,500 from all-time highs. Why wouldn't you take advantage of what you know, not what you're hoping might happen, right? So take a little of your cash, deploy it now, lock in that opportunity to buy well. And then if it goes lower, if you get your wish, buy some more and average down."

Looking longer term, all of the people I spoke to remain bullish on gold and silver, although they have different opinions on what could spark a turnaround. Adrian Day of Adrian Day Asset Management gave a concise breakdown of what he thinks needs to happen:

"We've really got a triumvirate of headwinds here, but they all revolve around the war. So if the war ends, the dollar falls, the oil price falls, relieves pressure on the CPI, which relieves concerns about the Fed hiking — and not just the Fed, it's central banks around the world ... that are talking about raising rates.

"And so the real question is, when does this start to reverse? I mean, again, the most important thing is the war. When that ends, one way or the other, the oil price retreats, CPI expectations come down, the dollar comes down and, you know, that then is positive for gold. But we're not there today."

Of course, a Rule Symposium recap wouldn't be complete without Rick Rule himself.

He also offered his thoughts on what it will take to get gold moving again — and what the scale of its increase could look like. Here's how he explained it:

"In the period of the 1970s, the gold price, as a consequence of inflation and negative real interest rates, ran from a low of US$35 to a high of US$850. In the middle of that move, in 1975, US Congress allowed US interest rates to rise, which broke the gold price — broke it from US$200 to US$100. The gold stocks did worse.

"(But) it wasn't just the gold price that broke. The bond market froze, the equity markets went down. (As a result,) Congress lost its nerve. When Congress lost their nerve and forced interest rates down, and forced liquidity into the market, gold went on a romp that began at US$100 and ended five years later at US$850. What we're seeing is a hiatus, perhaps not of the same drama as 1975, but we're seeing the same interest rate-related drama now, and I think the resolution is the same."

One final note on the conference.

While gold and silver were front and center, they're not the only commodities that came up — the three others most frequently mentioned as areas of opportunity were copper, oil and uranium.

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

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