Let’s talk gold.
Bloomberg reports that the gold price plunged overnight as 1.8 million paper ounces were sold within minutes.
‘Gold sank like a stone at 9am in London after a huge spike in volume in New York futures that traders said was probably the result of a “fat finger”, or erroneous order.
‘Trade shot up to 1.8 million ounces of gold in just a minute, a level not reached even with the surprise election of US President Donald Trump or Britain’s vote to leave the European Union.’
Years ago, when I knew a lot more, I would have screamed ‘manipulation!’ But now I’m not so sure. In fact, I doubt the manipulation angle very much.
Gold, like every other asset, moves around a lot. Sometimes weird things happen that you don’t have a decent explanation for.
Like why some idiot would put in a sell order for 18,149 futures contracts (representing 100 ounces per contract) in early (and thin) London trade? Maybe the person was an idiot, and actually meant to put in a sell order for 18,149 ounces?
Gold is a very dangerous investment. Not because it’s manipulated or not manipulated. Rather, it’s because gold is a very emotional asset. Gold represents ‘honest money’. It is an antidote to fraudulent central bankers and free-spending politicians.
If only gold was official money again, we’d be rid of all economic problems.
If you think of gold like this, it’s easy to see how you can fall in love with it. It’s representative of your morals. It’s the medium through which your moral view of life can be implemented via the marketplace.
No wonder you cry ‘manipulation’ whenever gold falls mysteriously. Someone who doesn’t share your view of honest money, and instead wants to benefit from a ‘fraudulent’ system, is clearly trying to take gold down.
On reflection, that’s how I probably thought about gold initially. But I wasn’t really thinking. I was believing.
Now I think about gold instead. I don’t see it as an absolute asset, standing alone, noble and tall against the morass of paper based financial assets. I simply see it as an asset whose price is relative to everything else.
It’s an unemotional view, and one that allows you to assess gold’s prospects with a much clearer head.
For example, earlier this month, on 7 June, I reviewed gold for readers of my investment advisory, Crisis & Opportunity. I explained that, as a currency, gold moved in tandem with the euro and the yen, and moved inversely to the US dollar.
I showed how the euro, the yen and gold were all ‘overbought’, a technical term meaning they had all moved too far too fast. When that happens, it’s usually time for a pullback. I concluded:
‘The euro and the yen look set to retreat in the coming weeks, while the US dollar should rally, at least in the short term. That will take gold down.
‘From there, the important thing to watch for is where gold bottoms. That will give us an indication of gold’s underlying strength.’
As it happened, gold peaked the day I wrote that. Having no emotional attachment to gold made it easy to make that call.
What does it means for gold now?
I’ll show you a chart of the gold price in a moment. For now, keep in mind that gold moves relative to other currencies. From Reuters:
‘The US dollar hit a one-month high against the yen and rebounded against the euro on Monday after the European Central Bank chief defended the ECB’s easy monetary policy, and as investors awaited Federal Reserve chair Janet Yellen’s speech on Tuesday.
‘The euro, which hit a more than one-week high against the US dollar of $US1.1219 earlier in the session after weaker-than-expected US May durable goods orders data fuelled doubts about the US economy and the Federal Reserve’s aggressive rate increase outlook, eased after Draghi’s remarks.’
When the euro is weak, gold usually is too. This is why the gold price fell overnight. Even so, despite the stupid sell order in early London trade, gold recovered partially, losing around US$10 an ounce in the session. It now trades around US$1,245 an ounce.
The important thing to keep an eye on now is where gold finds support in this correction. As you can see in the chart below, it recently bottomed around US$1,240 an ounce, before rallying for a few days.
Now, the correction might be in the process of continuing. If it does, you want to see gold hold above the May low, which was around US$1,215 an ounce. A break below here would be bearish in the short term, and suggest that at best, gold isn’t going to do much for a while.
[Click to enlarge]
This is not so much about gold as it is about the US dollar and the euro. With each decent piece of economic data out of the US, the prospects of another rate hike increase. That’s good for the greenback and bad for gold.
Likewise, any information from European Central Bank boss Mario Draghi about Europe’s quantitative easing program will move the major currencies around, including gold.
If the European recovery picks up and Draghi signals a wind-down of his money printing program, that should be good for both the euro and gold, and bad for the dollar.
Looking at the chart of the euro versus the greenback, you can see that it’s been strong all year (note how the euro and gold bottomed together in December 2016). But in the last month or so, the euro has run into resistance.
Is this the pause before another move higher, or will the euro resume its falls?
[Click to enlarge]
No one knows. I certainly don’t. The point to note is that gold’s moves in the short term will all depend on the euro and the US dollar.
A strong euro usually translates into a stronger gold price (in US dollars). So if you’re a gold bull, you need to be a euro bull too.