Gold: Is The Bull Market Really Over?

The recent price movement of gold has been frustrating for some people. The yellow precious metal logged its twelfth consecutive annual gain in dollar terms and climbed higher against every major fiat currency in 2012. However, gold has been stuck in consolidation mode and finished the year with its worst quarter in four years. Furthermore, some market participants are claiming the bull market is over.

Gold finished last year about 7.0 percent higher at $1,675 an ounce. It capped the longest streak of annual gains since at least 1920, but gold entered the new year with a less impressive record. Bullion prices declined for six consecutive weeks, representing its longest losing streak since 2004. This pullback comes along side of a wave of negative sentiment.

In November, Citigroup’s Edward L. Morse wrote that “the commodity super cycle is over.” He contributes a large part of the call to slowing growth in China and less demand from the nation. While he predicts gold to average $1,749 an ounce this year, he expects it to only average $1,655 an ounce in 2014. His forecast on silver is $26.50 an ounce in 2014. Citigroup’s call was followed by Goldman Sachs telling clients to sell gold, citing improving U.S. growth. Deutsche Bank, the German bank recently found to be profiting from manipulated LIBOR rates, also downgraded its outlook for gold and silver.

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More recently, the London Bullion Market Association’s top forecaster, Rene Hochreiter, told Bloomberg that the 12-year old bull market is over and gold would only reach a high of $1,700 an ounce this year. Although, he is more bullish on other precious metals. Hochreiter explains, “I think America will sort itself out and the economy will start moving again, positively. As gold declines, as the world economy improves, so will the industrial side, and platinum, palladium and silver will start to pick up.”

The Federal Reserve also added to the negative sentiment by suggesting that policymakers were divided about conducting bond purchases beyond this year. The latest Federal Open Market Committee minutes stated, “Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.”

However, the Fed is walking a swaying tightrope. The central bank jawboned financial markets for many months before finally unleashing a third round of quantitative easing in September, which was followed-up with QE4 only three months later. Why wouldn’t it try to keep inflation expectations or a distorted market somewhat in check by giving the appearance of monetary tightening? While some may think the Fed is trying to give subtle hints of an exit, it is hard to see the central bank stepping aside as it is estimated to absorb about 90 percent of net new dollar-denominated fixed income assets in 2012.

Additionally, the global economy still remains heavily dependent on central bank money printing and record low interest rates. The race to debase currencies is taking place around the world. When converted to U.S. dollars, the four major central banks have expanded their balance sheets to more than $13 trillion, according to Hayman Capital. In comparison, the amount was $3 trillion 10 years ago. Central banks now account for at least a quarter of all global gross domestic product, a sharp increase from only 10 percent in 2002. Could Ben Bernanke and company really be ready to pull the plug?

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If gold’s remarkable run is indeed over, it would be one of the smallest bull markets in recent history. On a percentage basis, the rise in gold over the past decade is smaller than the bull cycles of the Nikkei, Hang Seng, crude oil, homebuilding index, S&P 500, Nasdaq and gold’s previous run in the 1970s. Furthermore, the participation in the current gold run is relatively small, but future demand is likely to support prices.

David Rosenberg, chief economist and strategist at Gluskin Sheff and Associates, explains in his 2013 outlook, “Moreover, gold makes up a mere 0.05 percent share of global household net worth, and therefore, small incremental allocations into bullion or gold-type investments can exert a dramatic impact. Gold cannot be printed by central banks and is a monetary metal that is no government’s liability. It is malleable and its supply curve is inelastic over the intermediate term. And central banks, who were selling during the higher interest rate times of the 1980s and 1990s, are now reallocating their FX reserves towards gold, especially in Asia.”

While headlines often focus on the central banks conducting bond purchasing programs, the entities buying gold should not be ignored. New data from the Census and Statistics Department of the Hong Kong government shows that gold imports by China totaled 91 metric tons in November, almost double October’s haul. Depending on December’s reading, total imports for 2012 could easily top last year’s amount by 400 tons. Meanwhile, Japanese pension funds, the second-largest stack of retirement assets after the U.S., may increase their positions in gold-backed exchange-traded products to 100 billion yen by 2015, more than double the present amount. In general, central banks became net buyers of gold in 2009 for the first time in decades.

Here’s a look at how the SPDR Gold Trust ETF (NYSEARCA:GLD) holds a support base around the $150 mark:

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Considering the state of the world financial system and the increasing move towards hard assets, it is hard to believe that the bull market in gold is completely over. Pullbacks and corrections have and will occur, but it is too early to say gold’s time to shine is done. Investors looking to strengthen their portfolio with gold should use consolidation periods to build positions.

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Disclosure: Long EXK, AG, HL, PHYS

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