Gold Prices Update
Monday, 11/11/2013 23:06
Calling the direction of gold prices right in the summer, this analyst is now less sure...
WAYNE KAUFMAN is chief market analyst at Rockwell Securities. Here he speaks to
Hard Assets Investor's Mike Norman about where he thinks gold prices are now headed.
Hard Assets Investor: The last time you were here, in August, you made a very prescient call on gold prices. It was right around the time we saw a pretty sharp sell-off in gold. You'd said you were looking for a countertrend rally, maybe going as high as $1400. We got fairly close recently, before falling hard.
Kaufman: Gold has been bouncing. It's above the shorter-term moving averages, the 20- and 50-day. And it's got resistance in the low $1400s. Gold is around the mid-$1300s now.
Resistance in the low $1400s. You've got the price at about $1420-something. And then you've got the 200-day moving average, which is down-sloping. And that's coming into play and will be in play in the low $1400s soon. So that's going to really be the make-or-break time for gold. It's still a longer-term, countertrend rally in what's been a bear market. But we're going to see what happens. We're still under the three-month moving average. And I consider that to be reasonably important.
HAI: So we would have to get above there, in your view, to sort of change the outlook from a bear market?
Kaufman: To a long-term bullish trend again, yes, I'd need to see us get above the 200-day and break above that low $1400 price resistance.
HAI: What does that say for commodities in general?
Kaufman: This is such a great question; I wish I could give you a real crystal-clear answer. But the problem is, you've had the Dollar going down, gold has been going down, oil going down. All of these we saw simultaneously recently. So we have so many cross-currents and mixed data points that it's amazing. You get a lot of people who are totally bearish on commodities, and therefore global economy. But at the same time, I'm looking at, for example, lumber prices.
HAI: Economically sensitive, especially to the housing market...
Kaufman: Right. So I follow that. It's been making new highs. So if housing is going to be so bad, wouldn't lumber be bad also? So this is really across currents. Now, we know we've got a very dovish Fed coming in. It's not like we haven't had a dovish Fed. But Janet Yellen is a believer in the benefits of inflation. So it's really hard to see. You would think that commodities, particularly gold, would get a lot stronger with this. But it hasn't been that strong. So it does make you wonder.
HAI: If you use stocks as a barometer or a forecast of economic activity or economic sensitivity, they're giving a very bullish signal, aren't they?
Kaufman: Yes. Stocks are a leading indicator, as you correctly point out, making all-time highs. There are no sellers in the stock market. And, when you have no sellers, the path of least resistance is going to be up. The last week or so, we've seen some negative divergences develop. But that's more because of, in my opinion, buyers getting a little tired.
So what do I mean by negative divergences? The percentage of stocks today that are over their own 10-day moving average is only about 71%. Two weeks ago, it was 91%. Well, we're making new highs in the indexes. What happened to the 20% of stocks? That's a bearish or negative divergence. Stocks making new highs much less than today than when we made new highs on Oct. 18 – literally hundreds of stocks fewer.
So, now, you can view this as a top or as a consolidation. I view it more as a consolidation because you've a very dovish Fed. And you're entering a period of really, really strong, positive seasonality.
Earnings for this earnings season have been coming in tremendously, 68.5% so far. With more than half of the S&P 500 having reported, 68.5% have beat earnings expectations. And market breadth has been tremendous. Way back in August when I was here, I said we had not seen the type of deterioration we see ahead of important tops; still not seeing that.
HAI: Let's get back to Janet Yellen for a second. So you expect to see more effort on the part of the Fed next year, when she takes the helm, to try to cause inflation to pick up?
Kaufman: Yes. We're under their 2% target to begin with. But in addition, she has made statements, written papers. She's firmly in the camp that a certain amount of inflation is very beneficial. And her most important statistic that she looks at, for what she thinks the Fed's mandate should be, is employment. So if you've got a participation rate at decades-low numbers, or even historical low...if you know she likes inflation, and you know she hates unemployment, what does that tell you?
HAI: The problem is, I just don't see the transmission mechanism between monetary policy and job creation.
Kaufman: You're 100% right. And it's funny that you say that. Eugene Fama, who was one of the Nobel Prize winners for economics this year, they were asking him about that. And he said, "I don't see that it's doing anything." So I agree with you 100%. But a lot of the excess reserves find their way into the markets. And so the markets are benefiting.
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