Despite gold’s fall fundamentals suggesting rebound – but when?

Gold has been falling despite positive fundamentals. This suggests that there could be a turnaround if sentiment starts moving in favour. Could this happen in the second half of the year?

Gold may have found something of a temporary range in the $1240s over the past week. Sentiment has moved against it and barring some unforeseen event it may continue to fall through the early northern summer – traditionally a weak time for precious metals. But there is a huge dichotomy in its performance in that supply/demand fundamentals continue to look ever more positive, yet gold, and other precious metals, have been continuing to fall. Now whether this is, as some suggest, due to the machinations of the bullion banks suppressing the gold price on behalf some central banks (notably the U.S. Fed and the ECB), or just a collapse in pro-gold sentiment in the general investment arena remains to be seen, but if the latter some turnaround trigger could see gold positive sentiment return and the price soar – but when might this happen?

Jeff Nichols, one of the more down to earth of the normally pro-gold commentators, in his latest missive to clients, picks up strongly on the ever-improving fundamentals point. Despite a 5% fall in the gold price over the past couple of weeks he feels there is no reason for gold investors to despair. Easy to say as a commentator, but tough for those who may have seen their gold investments dive over the past two years. Is there no end to the decline?

Nichols feels, though, that fundamentals have so improved that a bounce-back seems likely in the short term, with bigger gains to be seen later this year. To an extent this ties in with the Elliott Wave predictions we referred to a week or so ago, although the latter sees a further short term downturn between now and August as probably being more severe than Nichols anticipates. But given that Elliott Wave theory is predicated on changes in overall sentiment over time, and the current wave trend suggests a turnaround in August, with a very sharp increase in precious metals prices to follow over the next eighteen months, there are indeed parallels between Nichols’ analysis and that of Peter Goodburn of WaveTrack International which we reported recently.

See: Gold to fall to $1,100 then skyrocket – silver, platinum in behind

While a mere mining engineer like myself is somewhat loath to give credence to technical analysis viewing it as being perhaps illogical as far as basic fundamentals are concerned, one also has to admit that those who see chart trends as price predictors are frequently correct.  However they do depend on how their charts are analysed and, no doubt, there are also other charts analyses projecting completely different precious metals price scenarios. It will be interesting to see how these play out. Those who get their findings wrong are quick to forget them while those who are right are equally quick to tell the world so. Such is life.

But coming back to Nichols’ thoughts, he reckons his price predictions are based on his pessimistic view of long term U.S. and global economic prospects, but that even if he is wrong on this and global economies are indeed improving in the manner many of the bank analysts are predicting (and they base their pessimistic views on precious metals prices on this scenario), Nichols feels this is somewhat irrelevant and that the gold price will take off regardless. 

He puts this down to the demand levels still apparent from the so-called Asian tigers – notably China and India. As Mineweb readers will know, we recently published an article noting that Bloomberg analysts have shown that China and India between them are purchasing more than the total of world newly mined gold production between them. Add into that significant gold purchases in many other middle Eastern and Asian nations in particular and the recent news that Russia purchased around 30 tonnes of gold in April for its official reserves and one wonders where all this gold is actually coming from, and how long purchases at this kind of level can continue without positively affecting the metal price.

See: China and India consuming more gold than the world mines

However as a contrary view one could point to 2013 when the gold price fell very sharply over the period despite record Chinese gold purchases. This dichotomy was largely put down by analysts to sales out of the major gold backed ETFs, but although net sales out of the ETFs seem to have recommenced again this year after a period of net purchases, sales out of the biggest gold ETF of all, GLD, have only totalled about 9 tonnes over the first 5 months of the year compared with over 550 tonnes over the whole of 2013. Sales out of GLD and other gold ETFs last year helped the gold price collapse – notably immediately following a ‘sell short’ call by Goldman Sachs in April last year (a recommendation reportedly emailed to all significant brokerages and hedge funds with the recommendation that they get their clients out of gold which Goldman suggested would fall to $850 an ounce). The subsequent gold price dive is now history, but the feeling now is any further sales out of the ETFs will be limited and the kind of price crash seen last April is unlikely. Even so the plethora of negative analyses out of the major banks seems to have been destined to affect sentiment towards gold adversely, and in this seems to have been successful – so far!

So what can turn this sentiment around? Nichols points to the potential, indeed the likelihood, that the new Modi Indian administration will at least relax the country’s current gold import restrictions leading to a possible demand surge later in the year. The Ukraine is still also seen as another potential geopolitical flashpoint. While the Western media seems to have lost interest a significant flare-up in the east of the country, perhaps involving Russian military intervention, could see safe haven investment returning to gold given the potential economic ramifications of anti-Russia sanctions with teeth!

From our side we have seen reports that Chinese gold demand is picking up again at the lower price levels after a couple of months of lower purchases. If this continues we say again, where is all this gold going to come from? If China and India are purchasing all the foreign newly mined gold, while scrap supplies are reduced because of lower prices, and sales out of the ETFs slow to a trickle, logic suggests there should be a change in direction for the gold price purely on a supply/demand basis.

Nichols adds to this his thoughts on global macro-economics. He reckons there is still insufficient demand in the main Western economies for goods and services and that austerity measures being pursued in a number of key nations, which he sees as misguided and inappropriate, in that cutting government spending is unlikely to encourage a boost in private spending.

While the U.S. Fed and other bodies are now looking at, or implementing, cuts in their growth enhancing policies in the belief that their economies are returning to pre-2008 growth levels, he feels this is a mistaken interpretation of what is actually happening in the real world. If real economic growth is seen not to return then this could rapidly turn sentiment around with regard to gold. And – as we pointed out earlier – the performance of the gold price is all about investor sentiment. Nichols feels that a much more positive view on gold may come into play in the second half of the current year and gold investors will certainly be hoping he is correct in his assumptions.

To check out Nichols’ views and subscribe to his service click on

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