While stocks were posting a record-setting year, gold lost its luster, losing 28% in 2013, the largest decline in more than three decades.
Of course, the steep drop affords a buying opportunity for many who may have missed out on the preceding multiyear bull run. However, for the time being, the momentum appears to be with the sellers.
In addition to the core fundamental drivers (e.g., increased risk appetite among many investors favoring equities instead of commodities, import restrictions from high-demand countries like India, and expectations for monetary policy tightening), Fidelity technical analyst Ching Tan, CMT, CFA®, shared with Viewpoints his thoughts on some of the key technical drivers for the yellow metal’s deep dive, and what to expect in 2014.
Gold bugs ran for cover in 2013. How would you describe investor behavior in the gold pits last year?
Tan: Sentiment on gold, as represented by the Market Vane Sentiment Survey and the U.S. Commodity Futures Trading Commission’s Commitments of Traders data, had been excessively bullish since the beginning of the most recent gold bull market in 2001 (see the chart below). As gold started losing its shine in 2011, that exuberance clearly began to dissipate. A “fire in the theater” crowd psychology appears to have helped accelerate the gold decline over the past couple of years, and the flames were particularly fierce in 2013.
After hitting an all-time high above $1,900 per troy ounce in 2011 and given the multiyear decline, could this be a secular (long-term) or cyclical (shorter-term) bear gold market?
Tan: It’s an interesting question, and definitely one that gold investors should be thinking about. I think that the uncertain status of the U.S. dollar as the global reserve currency could imply that the current decline in the price of gold could be cyclical in nature, instead of secular.
Given the major influence the dollar has on gold, do you see any short-term trends in the buck that could drive gold prices early in 2014?
Tan: Gold and the U.S. dollar have a very strong negative correlation (when the dollar goes up, gold goes down). On a short-term and intermediate-term basis, I believe that the U.S. dollar still has bullish momentum behind it. In my view, this is due primarily to the fact that divergent monetary policies across the world’s central banks have put the Fed at odds with other major developed economies. Moreover, there is little evidence of inflationary pressures, and that is not supportive of gold. Consequently, I think gold prices will likely continue to face downward price pressures.
What are the next key technical levels that might serve as inflection points near the current $1,240 per troy ounce price?
Tan: Given that I think we may see a further decline from the current price point, I see the next inflection point at the technically important level of $1,087. I believe this to be a conservative estimate. Interestingly enough, this level is a 50% Fibonacci retracement (a widely used technical estimate) of the bull market rally in gold from 1999 to 2011 [see the chart below].
The probability of this occurring could increase if gold speculators capitulate to the recent decline, causing a “selling climax.” I’d look for this to be confirmed by the sentiment readings swinging to overly pessimistic levels or extremely net-short in the futures market.
Will gold mining stocks continue to be impacted by softer bullion prices?
Tan: Gold prices and gold miners’ stock prices have a very strong positive correlation [see the chart below]. I think it’s safe to say that if gold prices decline, we might expect to see weakness in gold miners. [Editor’s note: the AMEX Gold Miners Index (GDM) declined more than 50% last year as gold prices plunged.]