One can make numerous arguments for the future direction of gold prices, citing a myriad of facts and statistics to justify one’s position, but the reality is there is only one factor that matters right now; the Fed is not delivering any more QE. This means gold prices will continue to head lower, a view we have held since the start of this year.

All other arguments are overridden by the simple reality that Bernanke is currently in discussion as to a potential “tapering” of QE, so additional easing is not even close to being on the table. The reasoning behind this is also simple; employment in the US is getting better, and has been for some time, therefore there is no need for further easing.

Provided that payrolls can keep coming in at around +200k on average each month, the Fed has no need to inject more stimulus into the economy. Gold bulls can question the accuracy of the data, or claim that in real life the employment situation is much worse that the statistics suggest, but the reality in the Fed follows these stats and therefore their action will be based on this data. We are not stating a view on the reliability of any data series, we are simply pointing out the Fed only looks at this one, and therefore as traders we have to look at what the Fed looks at in order to determine the future course of monetary policy.

Since the easing of monetary policy is the most bullish factor for gold, the lack of future easing is very bearish. On a longer term view gold has broken down significantly and done serious technical damage to the uptrend of recent years. This coupled with no more QE from the Fed means gold will trade at $1200 by the end of the year.

In the shorter term we could still see a rally back to $1450, which would be a welcome opportunity to gain short exposure to gold at better levels. $1350 is the next support level which will be broken in the next month or two, and then we will be heading down to $1200.

Silver prices will likely tumble much further, in percentage terms, than gold itself, due to the volatile nature of the market and the lack of liquidity. We believe that silver will be trading in the teens by year end, as a lack of demand for silver as a hedge against USD monetary easing overwhelms any increase in demand from the industrial side of an expanding global economy.

This scenario of significantly lower gold and silver prices for a sustained period of time will play havoc on the mining stocks, which have already been brutalized, having more than halved in less than a year.

We do not believe than this decline is over for miners. Much of the recent decline can be put down to investors coming to the realization that the super-profits they were expecting the miners to produce as gold and silver soared, simply were not going eventuate. However, we think the sector remains unprepared for a scenario where prices stay so low, for so long, and that many companies will actually struggle to remain viable, let alone reap massive profits.

Sometime over the next year, some mining stocks will start reporting negative earnings, as gold and silver fall lower than their costs of production. It is then that we will see the next leg down in the mining sector. However, this decline should be different to the recent drop, where miners were sold regardless of fundamentals. In the next leg down the selling will be concentrated in the weak miners that are not viable with lower prices, whilst the stronger miners will be spared somewhat. It is the weaker miners that we are currently shorting, please subscribe at www.skoptionstrading.com for further details.

Much of successful trading and investing depends on solely recognising and reacting to what is happening right now, rather than striving to predict how the world may look many years from now. Right now the Fed is not easing monetary policy, gold prices have broken down technically, and many miners have high costs of production that will choke them as gold heads lower. Therefore the best trading strategy in this environment is to short gold on any rallies and be short a select group of vulnerable mining stocks. If one must having a core holding in gold or mining stocks, then a hedge of being short the most vulnerable mining stocks, and potentially using options, to buy some insurance against the portfolio is worth looking into.

In conclusion our message is simple; forget everything else, there is no more QE so gold prices are not going higher. This time last year the Fed was moving towards QE3, now they are talking about tapering off purchases, and yet gold is only 15% lower! This presents an outstanding opportunity for those who can recognise that money can be made in gold when prices fall as well as when they are a rising.

Take care.

Bob Kirtley
Email:bob@gold-prices.biz

URL: www.silver-prices.net

URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.

Bob Kirtley Archive

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.