Has Gold Finally Bottomed?

Many punters love gold.

It’s a strange love-hate relationship.

They point to the global debt bubble, rising unemployment, money printing, Germany repatriating their gold and emerging markets buying more physical gold. The list goes on…

While the arguments — in theory — resonate with a higher gold price, something isn’t right.

Gold has crashed since 2011. After peaking at US$1,920 per ounce, it’s down nearly 45%.

Why?

Putting it into perspective…

The world is facing a major sovereign debt crisis, a commodity junk bond crisis, an emerging market crisis, a global banking collapse and a major war in the years ahead. You’d think punters would join the dots and buy gold…

Yet, precious metals have collapsed. And many gold stocks have crashed by 80–90%.

Meanwhile, punters still love gold. They cheer every move higher, thinking the bottom has arrived.

For example, last week the yellow metal jumped from US$1,117 to US$1,173 per ounce. And as you’re likely aware, gold has surged from its December low of US$1,046 per ounce.

But they’re ignoring the bigger picture…at their own peril

Looking forward, the US gold price remains in a down trend. It’ll get worse, before it gets better.

If you love gold, watch crude

Why should gold bugs keep an eye on crude? Because gold’s near-term future will be affected by the continuing slump in oil.

I’ll explain…

As I wrote to Resource Speculator readers on 5 March 2015:

The fact is that supply [of crude] far outweighs demand.

On the demand side… growth in the major economies is stagnant… This ‘deflationary’ phase is crippling the need for crude oil.

On the supply side we’re seeing significantly more oil brought to market.

Two main players influence the supply side — OPEC and the US.

Saudi Arabia, the largest OPEC producer, has increased production to 9.5 million barrels of oil per day; the highest level since 2013…. At the same time, US oil producers are now pumping roughly 9.5 million barrels per day. US crude inventories have climbed to the highest levels in over 80 years.

Unfortunately, the demand and supply story will get worse before it gets better. Although, if you believe the mainstream, you may think otherwise. Reuters reported,

Saudi Arabia’s oil minister Ali al-Naimi discussed cooperation between OPEC members and other oil producers to stabilize the global oil market with his Venezuelan counterpart on Sunday, state news agency SPA reported.

Venezuela’s Oil Minister Eulogio Del Pino, who is on a tour of oil producers to lobby for action to prop up prices, said his meeting with Naimi was “productive”, his ministry reported.

Cash-strapped OPEC member Venezuela has been calling for an emergency meeting of producers to discuss steps to prop up prices, which are close to their lowest since 2003.

No doubt, crude should jump if production is cut. That said, there’s little chance OPEC will cut production.

Iran wants to bring on another 500,000 barrels per day to recover its lost market share. Meanwhile, according to Bloomberg, the US is pumping more crude than Saudi Arabia. Saudi isn’t going to cut production in the months ahead. If they did, others will only produce more and say ‘thanks for the extra coin’.

This doesn’t bode well for Venezuela…

Get ready for the gold crash

To pay the bills, Venezuela’s been selling its gold reserves. As I reported in Resource Speculator on 5 November 2015,

Making matters even worse for gold, hedge funds have flagged their interest in selling 430 tonnes on gold onto the open market according to mining.com. And since Venezuela has already started dumping its gold reserves onto the market to meet its debt repayments, this will only add fuel to the coming gold crash.

With US$12 billion in debt due in 2016, it is likely that Venezuela will run out of liquid reserves in the next 12 months. Barclays analysts said, “We expect Venezuela will use gold reserves to gain liquidity to ensure bond payments through at least the first quarter of 2016”.

According to Barclays, Venezuela needs to raise US$22.7 billion in 2016. Venezuela has less than US$10 billion in gold reserves.

Nonetheless, the market seems confident it can meet its next debt commitment: US$2.23 billion due next month. But, US$2.23 billion of gold should be dumped onto the market to pay the bill.

When this happens, the gold price should crash to US$931 per ounce. Of course, this won’t happen in one day. But, after the gold dump, the trend should accelerate quickly…

Remember, gold crashed by more than US$100 per ounce this time last year.

Punters are sick and tired of seeing the gold price crash. When Venezuela’s gold hits the market, more are likely to throw in the towel. Despite the lower Aussie dollar, you can expect a number of Aussie gold miners to crash hard.

Over at Resource Speculator I’ve been bearish on gold for over two years. And while the trend is still down, it won’t stay this way forever. I’ll be looking at sweeping up the bargains, near or at the bottom.

If you want to be on the right side of the market, click here.

Regards,

Jason Stevenson,

Resources Analyst

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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