Is the gold bull market over already?
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| Nick Hubble | 28 May 2020 |
Is the gold bull market over already?
The intraday rebound
Two hours after its opening, the Nasdaq 100 looked like it would close in the negatives. But then it recouped the losses and finished in positive territory. Why? Well, the answer is probably in Japan…
| | Dear Subscriber,
Stocks are up, the gold price is down. That's an unusual combination. It suggests the Covid-19 crisis is over.
The gold price rallies on stimulus and on concerns over the financial system. Gold is an inflation hedge and protects from counterparty risk. Those are two very different scenarios, making any given move in gold tough to figure out.
While central bank and government stimulus is off the charts, which should make gold go up, it seems that counterparty risk is becoming less of a worry. And it's the latter which the gold price is reacting to, falling below $1,700 again.
That's especially disappointing for those who thought the gold price had broken out of a wedge-shape formation – a sign of a boom to come. Having broken out, the gold price then tumbled back down abruptly.
But there's also something odd going on in the gold market. I'm considering opening a CFD account to trade it.
You may be interested in| Unseen changes are coming to the way you protect and build your wealth.
The fallout from the current crisis will leave many behind.
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Here's a chart from goldprice.org. It shows the hourly gold price for the last two weeks. Each of those bars being an hour's worth of trading.
You'll notice there were three big legs down in the gold price.
Source: goldprice.org What I'd like to point out is the timing of those three legs down. They all occurred between 8 and 10 am Eastern Daylight Time – that's the East Coast of the US. It's when markets open.
This pattern goes back much further. Huge selloffs have been occurring between 8 and 10 each morning in the US for quite some time.
Now it doesn't happen every day. But it's at those times gold prices are hammered lower, when they are. And they have been three times in the last two weeks, reversing impressive gains.
If you know what time these sell-offs take place, it could be a profitable trade. As I write this, your yesterday afternoon, another such selloff is underway at the designated time…
It's a reminder that the gold price is an oddity in the financial world. Because gold is an odd asset.
It's politically sensitive, for a start. Gold used to be money. And frequent attempts at fiat currencies all end the same way – with a return to gold.
When this happens, governments can confiscate their citizens' gold in order to get their hands on enough of it. Hedge fund manager Crispin Odey recently warned this may happen again.
A rising gold price is seen as a loss of faith in government-backed currencies because it's an opt-out. People are hiding their wealth, which is a bad sign for politicians.
The gold price is set by the gold futures market. And we know from the negative oil price shemozzle how things can go haywire there.
Here in London, the physical gold price is set by a small group of banks in an odd way. I won't detail how, but in some sort of Freudian slip, this is called the London Gold Fix…
The point being that the gold price is ripe for manipulation. That used to be a kooky conspiracy theory. Until people were convicted for doing it. Bloomberg reports that the practice may have been institutional:
| U.S. authorities that accused six JPMorgan Chase & Co. employees of rigging precious-metals futures are building a criminal case against the bank itself, two people familiar with the situation said.
The previously unreported investigation of the global bank's parent company, part of a wide-ranging federal clampdown on market manipulation, raises the prospect of criminal charges and significant fines against America's largest bank.
| | Here in the UK, Barclays got fined too over the gold price too, in 2014.
Back when gold price manipulation was still a conspiracy theory, a long list of other financial market prices were being manipulated. As trader after trader got caught, gold seemed to be the only price not getting manipulated. Now we know it wasn't.
It's not just banks that manipulate the gold price. Central banks are the major holders of gold. And governments like China and Russia are amongst its biggest buyers. So it's a politically sensitive asset too.
Gold is one of the few ways to facilitate trade transactions which the US government system can't block. Rogue nations deal in gold because of this. That's why Venezuela is suing the Bank of England to hand over its gold.
Gold investors need to understand the nature of the gold price because it is so caught up in controversy.
There is, of course, a clever way to escape a lot of gold's notorious nature. And that's to own gold stocks instead.
Central bankers do this too.
Did you know that the Swiss central bank owns a ton of gold stocks? According to its filings with the US stockmarket regulator, the SNB owns 24 different gold mining stocks for a position of $1.216 billion and nine silver stocks totalling $26 million.
The advantage of owning gold stocks is obvious. It's a government-approved version of investing in gold. Politicians don't confiscate your shares…
Gold in the ground is also surprisingly safe, in a sense. And gold companies are turning into cash cows with the gold price where it is. In other words, owning gold this way can pay.
If you're worried about Crispin Odey's warnings that governments could come for your gold, or if you believe the gold price is still being suppressed, why not look at this alternative way to profit from the rising gold price?
Our gold stock analyst would like to show you how.
Nick Hubble
Editor, Southbank Investment Research
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