The gold market has, by recent standards, been fairly quiet over the last few months. The SPDR Gold Trust ETF (GLD) has basically traded between 160 and 170 since October. I can't escape the feeling that it is about to do something. The question is what?
The problem most people have when looking at possible moves in gold is that it has no intrinsic value that can be assessed. Fluctuations in the price are usually a reaction to something else. It goes up in times of panic and It reacts to the value of the dollar. Of course there are those who will regard that as heresy. To them, gold is the only thing with intrinsic value. Their argument had some validity when the metal was the foundation of the global economic system; today, not so much. You can wish all you like for a return to those days, but, in general, reality is a better starting point for investment decisions than wishes.
Now that I have upset the gold bugs (although most of them probably stopped reading at the mention of GLD), what does 2013 hold for gold?
To me, gold is just another currency in many ways. To understand what drives it you must understand something fundamental about the Foreign Exchange market. You cannot just buy US Dollars if you think the dollar is going up. You have to pay for them with something; Euros,Yen,Zloty or whatever. When you go long of one currency, you go short of another by definition. When you short a currency, you pay interest, which is offset by the interest paid on the long currency. Gold pays no interest. In fact, if you hold the physical metal, you have storage costs, a kind of negative interest. For major investors to buy gold they have to believe there is no better opportunity anywhere.
I don't believe that will be the case in 2013. Last week's growth in Chinese GDP was an encouraging sign for global growth and the US still seems to be grinding through a slow recovery. No matter what the fear-mongers would have you believe, hyper-inflation is not just around the corner and, while I can see the US Dollar drifting a little lower, the possible returns on US equities will keep it supported. I believe the "risk-on" trades that we saw last year will continue and gold may suffer as a result. I expect this to be a theme this year; safety will be out of vogue for a while, putting downward pressure on both gold and US Treasuries.
The above chart shows that the technical pattern is already formed, with lower lows and lower highs since early October. The rally back above 160 in GLD looks like a good selling opportunity to me. In fact, a sharp decline to below 150 looks likely in the short term, followed by a drift down to around 120.
I always like to have parameters defined on each side if I am considering a trade, and the logical stop on a break of 170 to the upside, combined with a target close to 120 on the downside, makes this look attractive from a risk/reward perspective as well.
Gold has had an unbelievable bull run over the last decade, but, to me, everything points to this year marking its end, at least for a while.
Martin Tillier has been dragged, kicking and screaming, into the 21stÂ century and can now be followed on Twitter @MartinTillier.