Timing Gold

A friend called me up a couple weeks ago. He wanted to know when would be a good time to buy some gold coins.

I told him to call someone else.

Actually, I didn’t. But I did tell him to consider waiting. I thought gold could go significantly lower.

Gold started that “significantly lower” move this week. So my advice wasn’t too bad in the grand scheme of things. 

But Elliott Wave’s was better.

Earlier this week — on Monday, actually — Elliott Wave International released a short-term update to their subscribers. I’ll let them explain:

Gold and Silver: A Great Day to be a Bear 

Elliott wave analysis is the blade-proof glove with which “to catch a falling knife”
By Elliott Wave International

In the wee morning hours before dawn on Thursday, June 20, the precious metals’ rooster crowed, “Cock-a-doodle-DOH!” First, gold prices plummeted 4% then 5% then 6% below $1300 per ounce to their lowest level in nearly three years. Soon, silver followed in an even steeper drop below $20. Read more.

Is Elliott Wave International suggesting, with their falling knife subtitle, that it’s time to buy gold?

I guess you’ll have to read to find out. But I know that other gold watchers are open to an even deeper dip — into the $1,100 range if gold can’t stabilize soon.

Regardless, you have to wonder if we are not nearing the end of gold’s downside:


[Click on the image to view a full-size chart of gold futures.]

Clearly, gold needed a real correction after what everyone notes as 12 years in a solid bull market. It would seem that the latest surge lower is in reaction to interest rate expectations. (Remember: gold doesn’t offer yield, which makes it less appealing in an environment of rising interest rates.)

But are expectations for rising interest rates — courtesy of the collapse we’ve seen in Treasury prices lately — well founded?

As Elliott Wave touches on, Ben Bernanke gave no obvious indication of a concrete change in policy after this week’s FOMC meeting. There has been no change to bond or MBS purchases. And there certainly has been no indication of when an interest rate hike will happen (except for Fed Funds Futures indicating traders now expect the first rate hike will come in January 2014 instead of January 2015.)

So might this latest interest rate chaos wind down soon?

It’s possible. 

I don’t claim to have blade-proof gloves, but if Treasuries at least stabilize around current levels (or even rally, a scenario Jack discussed recently) and the risk-off mood takes US stocks on a much-overdue and deeper-than-expected correction, and other assets continue to flounder, then maybe gold comes back into favor a bit.


[Click on image to view full-size chart of 30-year US Treasury Bond futures.]

That could mean the yellow metal lays a foundation that provides a rallying point once investors calm down. Because after this sell-off finishes, central bank policy will not have changed in any way that substantially undermines the low-interest rate status quo.

And it won’t, if global central banks have anything to say about it. The only real obstacle is if the market generates financial system risks of its own that policy accommodation can’t manipulate in the near-term.

-JR Crooks