Zak Mir on Gold

As most of us are aware, the recent history of Gold and other precious metals has not been a happy one. This is one situation where you could say that according to the cliché, almost all traders have been fooled all of the time!

During the height of the financial crisis we were led to believe (by many dubious financial commentators) that Gold would be around $5,000 an ounce by now. The theory was (and perhaps still is) a parabolic progression to the upside would be fuelled by the systematic destruction of fiat currencies in the wake of the crisis. The argument was that the only path to salvation for Governments / central banks was to whittle away the value of the massive sovereign debt which had been built up to save the banks. What a good idea that was!

But with Gold now languishing near $1,300/oz, this theory has not panned out… A significant part of the explanation is that the journey from below $300 an ounce at the start of the last decade, to $1,900, was enough to factor in a significant asset bubble environment.

The other aspect is a pet subject of mine, and maybe is something I would have developed if I had stayed at the London School of Economics as an Economics undergraduate for a little longer than six weeks.

This rogue variable is pricing power and its effect on inflation. Pricing power in general has been eroded by competition and massive overcapacity from emerging markets, along with the increasing integration of the internet. While the internet was ironically caught up in the Dotcom Bubble, I would argue that it has through the online price comparison mechanism become a massive deflationary force, and will continue to do so throughout many sectors and services. If the promise of 3D printing is as revolutionary as it threatens to be, manufacturing costs will plummet yet further and take shop prices lower still.

The other point to note is in the few areas where the internet cannot do its work we have seen the runaway inflation which the Gold Bugs were looking for at the start of the 2010s  – cartels, monopolies (utilities in particular) and areas where there is limited supply such as central London real estate.

The question is whether this inflation will trickle down to the rest of the economy. I doubt this will be the case, given the way that Japan’s post 1990s bubble has still to have inflation injected into it, with the demographics of an ageing population adding to the struggle Abenomics has to face. Indeed, I would suggest that the best and arguably only big source of rampant inflation on tap in the near future would be from a geopolitical meltdown, something our friends in Russia are working on. Perhaps it could be said that deflation is just as much a source of instability as inflation is.

All of this brings me back to the latest bounce in Gold, which flying in the face of the Federal Reserve’s new $10 billion taper of QE reminds us that as far as the interest rate cycle is concerned it is very much down to geopolitics to drive this market higher.

From a charting perspective it can be seen that the post March price action for the metal is very much focused on the floor of a rising November price channel running through $1,290 currently, and just below the 200 day moving average at $1,299. The likelihood is that even though some cautious traders might wish to wait on an end of day close back above the 50 day moving average – currently at $1,315 – as their buy trigger, enough has probably been done to take this market back towards the $1,400 range highs of 2014 to date.

Given that the post summer chart pattern here is an inverted head & shoulders, for the really significant upside to materialise it is $1,400 neckline resistance which needs to be conquered, a prospect which from current levels seems challenging at this juncture.