Did The Gold Price Just Put In A Capitulation Bottom?

Black Friday was the worst day for gold prices in three years with a dip to $1,052 an ounce. That’s almost exactly the bottom in prices that many chartists have been saying has to occur before a price rebound. 

As I write this morning (Tuesday) in Dubai the price of the yellow metal has rebounded to $1.072 an ounce. So has gold just put in a capitulation bottom?

All bear markets have to end somewhere and they typically end in a climax of selling and a sharp dip in the price. Well, we almost saw that on Friday. In fact the cause of the price slump was a mysterious large dumping of gold in the middle of the previous night by a single seller. 

Yes, that’s the gold cartel manipulating the price for the umpteenth time. You don’t need to be a hedge fund rocket scientist or Comex fraud investigator to spot it. A blind five year old could find it in brail. But did they just do it for the last time in a downward direction?

Gold price fundamentals

Fundamentals do still come into play. The cartel can exaggerate and distort a trend line but arguably it can not go entirely against the forces of supply and demand. So what is everybody watching right now?

We know the Federal Reserve meets on December 16th and may or may not decide at that meeting to raise interest rates for the first time in nine years. This is a big deal. When central banks take away the punch bowl the party is always over, although some observers on Wall Street do seem to have forgotten this in their bullish fervor. 

The Goldman Sachs’ case against gold - which so many on Wall Street at least appear to be following as gospel truth - is that raising interest rates will crush gold prices because why hold an asset like gold that pays no interest when you can get it on a dollar account? 

Actually given the 12-year high in the valuation of the US dollar against a basket of global currencies there is a very good reason to diversify away from the dollar. We all know only too obviously from our experience of financial markets that being number one means you have really only one direction to go, and that what is up today will go down tomorrow. Gold is the best hedge against a falling US dollar.

Dollar top?

So what happens to gold prices if the Fed backs off and proves to have been bluffing the market again on raising interest rates? Gold prices will surely rebound, and the US dollar will fall. And why should gold not head quickly back to $1,300 an ounce, where it was earlier this year before all this talk about interest rates started? 

Then again if interest rates go up, as expected then where does the gold price go? Surely the worst case scenario is already factored  into the gold price, and any rise in interest rates will come with a sugar-coated promise not to raise rates too fast, too soon. Gold could quickly swoon on that news too, as the doom and gloom is shown to be overdone.

Thus the case for Black Friday being the capitulation bottom for the gold price is pretty strong. What else could take the gold price higher from here?

Remember the Federal Reserve is not the only central bank in the world. The European Union, and not the United States or China, is the largest economic bloc in the world today. Watch out for statements coming from the European Central Bank chief Mario Draghi about more asset purchases and a further commitment to negative interest rates. 

Devaluation protection

Gold might not pay interest on deposits but it also does not charge interest like euro bonds. Europeans holding gold have not lost money over the past couple of years. Far from it, they have been protected from a 25 per cent devaluation of the euro versus the dollar.

Perhaps the Chinese are paying attention. For what is the outlook for the yuan in 2016? Don’t expect its inclusion in the International Monetary Fund’s Special Drawing Rights on Monday to protect yuan-holders against devaluation. Last August we saw what a four per cent devaluation could do to the Chinese stock markets, and what this sort of financial instability has done for the demand for gold in China.

This year will be a record for gold purchases by China. Think like a local Chinese investor who’s just lost his or her shirt on the stock market and wants to protect themselves against a well flagged yuan devaluation. Gold is really the only option they have with the local wealth management products decimated by the stock market crash and rampant corruption. And precious metals are freely available and widely traded across China. 

What about the Japanese investor in 2016? The Bank of Japan is committed to the biggest money printing program in the world. It also badly wants to devalue its national currency. Buying gold is again a logical shield against a central bank committed to this end. 

Gold cartel action?

Could it be that the gold price manipulators who can still make and cancel large trades at odd hours to force gold and silver prices up and down, have also realized that their game is up? They will also be only too aware that gold and silver stocks in the Comex warehouses are running at record lows. After all they will be the ones doing the withdrawals. There is barely enough to cover a typical December’s withdrawals.

Are we approaching a lift-off point for gold prices when the price is valued by physical supply and demand rather than a manipulated futures market? It may be that this will be the moment that everybody likes to say they spotted but hardly anybody actually did. 

I can’t remember seeing so much pessimism in the gold market since I correctly and very publicly called the gold price market bottom in the global financial crisis.