So is the gold bull over?

Last week’s commentary ended with the statement, “The high volatility in the gold market may well continue this week, but odds favour that it will be to the upside for gold, rather than as a continuation of the sell-off.”

How wrong can one be!

With war psychosis taking over in the US and with both Japan and India – two stalwarts of the gold purchasing market –on holiday on Friday, those who desire a lower gold price had a ‘golden opportunity’ to slam the price down to 6, back to where it was in mid-December of last year, well before the break-out higher from the 6-month consolidation in the gold price. And where they will try to keep the gold price after frightening off just about every gold bull of the past year and more.

Or will they?

To repeat old information: the gold price fell from over 0 in early 1996 to nearly 0 in 2001 because supply, augmented by leasing from central banks – exceeded supply. As of March 2001 the gold price has risen quite consistently, keeping to a well-defined bull channel, presumably because the supply from central banks is drying up and/or gold has become more attractive to a wider range of purchasers, so that demand again exceeds supply. Will the sudden and steep sell-off of gold over the past month – beginning with the 50% increase in Comex margin – herald a new bear market in gold or is this merely the first really significant correction in the long term gold bull market?

Similar to what happened in September 2001, it may turn out that the Iraq war is no more than an intermission in a longer term US bear market. The fundamentals are still in place; the war has not increases capacity utilisation in US factories to where investment in new and additional plant is required; it has not wiped the slate clean of consumer debt, not are US corporations out of the woods with freedom to price products at levels where they can show good improvement in profitability.

For the objective observer the real question is not whether the record gains on Wall Street last week can be the start of a new bull market, but only how long the relief rally will last. That, of course, will be largely determined by the fortunes of war. More certain is that a resumption of the Wall Street bear market will take place at when investors return to the realisation that the Dow Jones and associated indices have a long way to go before they are priced at a level where real investor accumulation will take place.

Until then, uncertainty about the future of global financial markets will rest heavily on mostly foreign investors, prompting them to keep at least a small part of their wealth in the yellow metal – which at a price of the middle 0’s presents a really good bargain.

The daily chart of the PM fix displays a good channel going back 2 years to the start of the bull market. Support at the bottom of the channel is now at 0,50, which implies that any PM fix on Monday this week above 9 will keep the channel intact – allowing about 0,5% for accuracy. That will require a -4 increase in the gold price during the day and into early US trade, a time when the gold price often gets trashed.

While a PM fix above 9 on Monday cannot guarantee that gold is out of the woods, it will be a at least an indication that the sell-off has run its course. That gold has a chance of recovering at least some of the lost gains of the last few weeks.

It is as yet too early to answer the opening question of the title – is the gold bull over?

On the premise that demand has exceeded supply for the past two years and – given the lopsided fundamentals in the US economy – also that the climate is likely to continue to favour an appetite for gold, the gold price is unlikely to remain below 0 (even below 0!) for long. That would imply that it is now time to stock up on gold and gold shares.

The wild card for South African investors is likely to be the rand. But that is a topic for another time.