Don’t Be Fooled by Gold’s Decline: The Bull Marches On

Source: Thinkstock

Source: Thinkstock

Gold has been weakening over the past several weeks, and, on Tuesday, the bottom seemed to have fallen out of the market. The gold price fell about 2 percent to $1,265/ounce and the Market Vectors Gold Miner ETF (NYSEARCA:GDX) was down nearly 4 percent.

The move in gold was largely the result of data coming out of China showing a substantial decline in gold imports in April year over year from 76 tonnes to 65 tonnes. On a longer timeline this decline is hardly noticeable, as the 65-tonne statistic is several times greater than the numbers that were being reported just a few years ago, as the following chart illustrates.

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As you can see April gold buying hardly makes a blip on this chart in the years prior to 2012. So in this context one can see that net gold imports are up. Think of it this way: If you buy a stock at $5/share and it rises to $80/share, and then it falls to $65/share do you whine about the $15/share you’ve lost or rejoice in the thirteen-fold gain in your investment? If you look at some of the media headlines you get a rather bearish picture:

But the above chart tells a different story — gold demand is rising quite rapidly, although it is not rising in a straight line.

But while gold is falling on news that, at a second glance, really isn’t so bearish, investors have to acknowledge that the price has broken out of its recent trading range to the downside. Does this mean that the price is going to fall further from here? This is a distinct possibility even if you are long-term bullish on gold as I am — prices never move in a straight line.

While the price clearly fell out of its trading range it did find support at the $1,260/ounce to $1,270/ounce level that acted as the first level of resistance that the price hit earlier this year after making a double bottom in December. If this level fails to hold, I think there is a good possibility that the price can test the double bottom lows of $1,180/ounce to $1,200/ounce. If it breaches this level, I suspect that it will generate violent technical selling, although it should be short-lived.  The bottoming process often ends with prices shooting downward before they slingshot higher.

Recall that this is the pattern that stocks exhibited in March of 2009 when they relentlessly declined for a few days before rocketing higher. Investors were paraded on CNBC and similar networks telling us that the S&P would fall to 400 and that we were headed towards another Great Depression.

As a gold bull I would welcome something akin to this — i.e. a few days of violent selling in the gold market while the pundits fight to be the most bearish commentator on gold. This is when I will be buying. For now I continue to dollar cost average by buying a small amount each month. I may not be buying the bottom, but I am confident that in five years from now it won’t matter much.

Disclosure: Ben Kramer-Miller is long gold coins and shares in select gold mining stocks.

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