Gold has been topical of late, especially since May 22 when traders charged for the exits after the US Federal Reserve Chairman Ben Bernanke said the central bank may reduce bond purchases later this year as the economy strengthens. Mr Bernanke went on to say that the Fed may “moderate” its pace of bond purchases later this year and may end them around mid-2014, and that risks to the outlook for the economy and the labour market have “diminished”. These comments caused commodity prices to plunge and gold prices reached the lowest levels since 2010.
The Aussie Materials sector has taken a hammering this year (see last week’s article on the materials sector and your portfolio), falling -28% from its February peak into the end of June, with falling commodity prices and the recent weakness in the Aussie dollar adding to the underperformance of our miners.
Today we thought it may be timely to reassess the picture on gold, given the volatility we have seen in the ASX Gold Mining sector in the past few weeks.
The price of gold has been under relentless selling pressure since October last year and it went parabolic to the downside from the start of this year, with extreme selling in the last week of June.
The bears have firmly been in control over the past year, with the gold price being influenced by many drivers, both here and abroad. In recent times some of these keys drivers have been:
• Chinese economic growth slowing, translating into falling demand levels for commodities
• European reaction to the prospect of a new round of sovereign debt issues
• Performance of the US market, post the Presidential elections and “fiscal cliff”
• The Australian economy and how it is coping with the peak in the mining investment cycle
• India, the world’s largest gold buyer, increasing a tax on bullion imports to curb its record current-account deficit and expecting to cut 2013 gold imports by 20%.
Investor sentiment has been driven by these key influences, which in turn impacts on whether investors are looking to gold as a safe-haven or reserve currency. Typically when a market recovers from a period of despair, it takes a while for the marketplace to reset itself and this will likely be the case this year.
The selling in late June may have marked the capitulation of the sellers. At least we have seen a recovery in the gold price in recent times and now the critical pricing levels are $US1180 and $US1300 (as shown below).
CHART 1: Gold Price Is Under Pressure
The gold chart above shows that gold traders have been cashing out in the chase for yield since last year.
Seasonally the gold price sells in the second quarter of the calendar year (refer to the chart below) and this year weakness in the gold price has been excessive, with the headwinds of the worsening Chinese economy, the ever-present eurozone debt crisis which is threatening the European recovery and the increasing import taxes for gold in India.
Central Bank Coordinated Stimulus
There has been a coordinated global move by central banks towards stimulus:
• In the US the Federal Reserve will keep buying bonds at a pace of $US85 billion a month, and it’s prepared to increase or reduce the pace of purchases depending on the outlook for the job market and inflation. Fed officials forecast the US unemployment rate will fall to between 6.5 and 6.8 percent by the end of 2014, and anticipate that inflation over the medium term likely will run at or below its 2 percent objective. The Fed said the rate will remain in a range of 0 to 0.25 percent so long as unemployment remains above 6.5 percent (it’s currently running at 7.6 percent) and the outlook for inflation is no higher than 2.5 percent.
• The Bank of Japan (BoJ) also help sentiment by recently reaffirming its April pledge to expand the monetary base by YEN60 to YEN70 trillion (over $US600 billion) per year.
• The European Central Bank left interest rates on hold, and confirmed they will remain low for an extended period of time. Sentiment has recently picked up as European governments agreed to release EUR3 billion of aid for Greece, seeking to settle financial concerns over the eurozone debt crisis, at least until we see the German elections in September.
• Premier Li Keqiang has said the Chinese government will seek to keep economic growth, employment and inflation within limits, avoiding “wide fluctuations.”
However the gold price has shown weakness despite all this stimulus.
Seasonality of Gold Price Movements
The World Gold Council has predicted an all-time high quarterly demand for gold in Q2, with Asian gold demand from April to June of this year reaching an all-time high, according to the World Gold Council. Consumers across Asia, and in particular in China and India, have viewed the recent price collapse and ETF outflows as a great buying opportunity, according to the WGC.
A review of the quarterly gold price performance over the past decade shows that the third and fourth quarters generally outperform for the calendar year. The average performance over the past decade for quarters Q3 and Q4, have been 6.1% and 4.5% respectively. This data is illustrated in the chart below.
The chart confirms that in only two of the past ten years has the gold price gone backwards in the second half of the year. You can also see that the gold price performance for the first half of this year (2013), has been an outlier in the past decade (down -23% for this period). The gold price in this new quarter has rebounded, up 5% since the start of July 2013.
With all the selling in the past few quarters, gold is setting up for a recovery. However for a sustained rebound to occur, the gold price needs to respect the recent low of $1180 and to break overhead resistance of $1300.
Recent Gold Price Moves
We can see gold stock prices have been volatile over the past few weeks, as traders have been accumulating in anticipation of a recovery in the gold price.
Overnight traders took profits on their gold stock positions, as Ben Bernanke reaffirmed that the Bernanke put remains in play, saying “tapering” of the Fed’s bond-buying program was not on a “preset course” and that “tapering” will only happen if the economic data improves. This news saw the gold price ease again.
In next week’s article we will show you how to identify some golden stocks that investors and traders should have on their radar, in anticipation of recovery in the gold price.
If you can’t wait until then you may like to take advantage of our Special Golden Report which provides an abridged list created from some specific filters including the fundamentals of the stocks. Contact D2MX Advisory for Our Special Golden Report to request a free copy.
Stocks To Trade
Your stock selection universe will depend on your trading capital and risk profile, refer to D2MX Advisory for assistance with this process.
The market has been volatile in May and June. There are a number of trades setting up right now, that you could potentially profit from. If you would like more information please contact me at 1300 610 024 or email D2MX Daily Trading Report.
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Investment Adviser – D2MX Trading
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
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