2015 has been a bad year for commodities. In fact, it’s been the awful totally rotten good-for-nothing sort of year so deeply painful for any commodity bulls that many former fans of the sector have sold out entirely. Many have forever forsworn even thinking about an investment in oil, natural gas, or gold ever again.
Oil has made a most notable decline, natural gas is bumping along near decade lows, metals prices have been falling across the board, agricultural commodities have gone to rot, even things like cattle, sugar, and coffee have gotten caught in the selling vortex.
However, for the shiniest of the commodities, the tide may have turned. Gold is many things to many people, some call it a commodity, some call it money, some call it nothing but a barbarous relic. Whatever it is, there’s one thing it’s no longer doing; falling.
In July, gold dropped violently through $1,150/ounce, which had previously been strong support, and reached a new nadir at $1,075/oz. At that point, just about everyone threw in the towel. Even the most ardent of goldbugs and metals newsletter writers started saying a final capitulation sell to under $1,000/oz would be necessary before gold’s vicious bear market could end.
Gold, which peaked at $1,900/oz four years ago and has been nothing but falling since then, has certainly run low on fans recently. And yet the dire predictions didn’t come to pass. Gold immediately regained the $1,100/oz level in August and has traded calmly since then.
Despite a renewed drop in oil and the commodity space, gold stood its ground. And now with oil’s recent rise gold too is catching a bid. Gold has been up 8 of the past 9 trading sessions and tacked on an emphatic $20/oz gain in Wednesday’s session to nearly tag the $1,200/oz level.
Silver similarly has posted a strong rebound since its low at $14/oz in August. It has pushed 10% higher over the past couple weeks and is now trading above $16/oz.
Gold miners have had an even more impressive run. The gold mining ETF (GDX), which had dropped 80% since its 2011 peak has finally found its footing. It bottomed at 13 in July and dipped back to that level in mid-September.
Since then, it’s rocketed up to 17, up 5% Wednesday and 30% over the past month. So what caused the profound change in sentiment and trading direction?
First and foremost, the recent weak US employment report was a big catalyst for gold. The conclusion from the weaker than expected readout on the US economy is that the Fed will now be forced to shelve the potential rate hike until 2016.
This turn of events was crucial to shoring up the general market; the S&P 500 has soared since this news was released. Gold, too, has benefited. All else held equal, lower interest rates are supportive for precious metals. Lower interest rates create higher inflation expectations, which people often hedge against by buying gold.
As a result of the change in the Fed’s outlook, the US dollar has also slumped in recent days. This has a way of helping gold, when you think about its price in US dollars. Say the Euro and Dollar are both worth 1. If gold is $1,000/oz, it’s also 1,000 Euros/oz. But when the dollar falls to 1.1 Euros/dollar, the same 1,000 Euro/oz gold price is now $1,100 dollars/oz. Without gold gaining any actual value, it’s risen 10% in value in your currency just due to changes in the exchange rate.
Finally, gold is rising due to geopolitical tensions in the Middle East related to the Syrian situation. Tensions are escalating between the US and Russia. While its unclear just how bad things may get, the uncertainty has put a firm bid under both gold and oil in recent days.
So is this move going to stick? Has gold entered a new bull market? The quick answer is that, no, this probably isn’t the beginning of a huge surge. But on the other hand, gold has put in a nice bottom, the odds of falling below $1,075/oz are certainly on the decline.
For potential buyers in gold, you want to see two things happen. You need real buyers to step in; that is demand from India or China who are the main consumers of gold. A move just based on speculators and fast flippers at hedge funds in New York wouldn’t last long.
And you need to see the dollar continuing falling. The dollar is at key support at the 1.15 Euro/dollar level. If that is breached, the dollar’s drop could intensify, which would provide a huge boost for gold. A break over the $1,240/oz gold level would lead to a big run northbound. But until then, don’t commit too firmly to the bull camp just yet.