Gold May Be Dead For Rest of 2009 (GLD, GDX, ABX, GG, NEM, GDXJ)

If there was a single trading event for investors, traders, and speculators from early October to early December, it was not stocks and was not bonds.  It was not even the bet against the US Dollar.   It was the bright shiny yellow stuff… Gold.  Gold rose by over 20% in dollar-terms.  The DJIA is up close to 10% since then and the S&P is up almost 8% in the same period.  Longer-dated Treasury notes and bonds have not made any real money in that time.  Yet gold has pulled back now that the US Dollar has gotten off its back, and the pullback from the highs is now at about 10% in price.  We took a look at many issues to see if a top has been put in or if this pullback is a significant buying opportunity.

On top of tracking the key ETF, the SPDR Gold Shares (GLD).  We also wanted to take a look at the Market Vectors Gold Miners ETF (NYSE: GDX) and its three key components of Barrick Gold Corporation (NYSE: ABX), Goldcorp Inc. (NYSE: GG), and Newmont Mining Corp. (NYSE: NEM).  Even the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) is worth noting here.

The first issue is the chart and what the technical patterns are saying.  Adam Hewison, a well-known technician and an affiliate of ours at INO, has provided a quick audio-video chart analysis.  His take is that gold has entered the silly season now that we are outside of the bands and on the backside of December 15.

We wanted to take our own look at this on the charts, and it seems very much a similar case.  After looking at the charts going back a year, gold could go back down to $1,050.00 or even closer to $1,000.00 per ounce before any long-term uptrend on the chart is violated.  Near-term is entirely different.  The bullish pattern has definitely been violated, and frankly this is what we’d refer to as a technical No Man’s Land.

Then there is the fundamental issue about gold and the ties to the Dollar and to interest rates.  It is true that the United States has been an outright violator of trust with our new deficit path and violations of the old debt ceiling.  We have billions, if not trillions, of dollars that may come into the money supply over the coming years.  The Chinese and the Middle East obviously want a hedge on protecting themselves from a weakening dollar.  The saving grace for the US greenback is Europe and the E.U. via the Euro.  Greece is in trouble with the ratings agencies.  Ireland, Spain, Austria, and other locales in Eastern Europe are potentially on the ropes.  The Brits are not a part of the Euro, but the Pound Sterling is at risk if it can’t quell the recent fears brought in by the ratings agencies.  Not everyone can hide in commodities, so any further developments in the E.U. would effectively take away the risk that the U.S. Dollar would further lose its position as the world’s reserve currency.

Then there is the notion of what will happen to US interest rates.  As of yesterday, the belief is that a Fed Funds hike will come in the summer of 2010.  That is too late if you take a snapshot today, but it is still now more likely.  A personal take is that this generally ramps faster and faster if strength or less weakness can remain.  The US Dollar Index may not be out of trouble entirely, but any rise in rates in the U.S. should offer at least a temporary floor to the US Dollar.  When was the last time you saw an interest rate cycle change and end on a “one and done” move by central banks?  If the US Dollar strengthens after a multi-year slide south, that will take away one of the major catalysts for gold bulls.

The recent pullback in gold has been seen in the gold miners and producers.  We usually take a look at the components inside the Market Vectors Gold Miners ETF (NYSE: GDX) to get a feel for the move between spot gold prices and the producers of gold.  That ETF is now down 18% from recent highs if you count the 5% slide today.  Barrick Gold Corporation (NYSE: ABX) is the largest component, Goldcorp Inc. (NYSE: GG) is the second largest component, and Newmont Mining Corp. (NYSE: NEM) is the third largest component.  The total ETF weighting for those three alone is almost 34%.  Here is the percentage price drop seen in each from recent highs: Barrick down almost 20%, Goldcorp down 18%, and Newmont down almost 16%.  Keep in mind that this is after large losses today.

Then came the launch of the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) in November.  This has been actively traded as traders look for leveraged bets on gold, and surprisingly it is only down about 16% from its post-launch highs.  ETFs of this cult caliber would be like having the second or third solar ETF or alternative energy ETF.  They may not mark a top, but they rarely come at any market or sector bottom.

There is a huge wild card for the gold sector which has yet to gather any steam.  Whether you like the CFTC or the administration of today, the reality is that its new directive is likely to be in force until the end of 2012 and it will not be even up for debate as to whether any real regime change in the U.S. is possible until after Congress’ mid-term elections.  That being said, imagine if the SPDR Gold Shares (NYSE: GLD) is deemed too large by regulators similar to what we have seen in energy ETF products, or even worse that it is an outright direct influence on the price of gold…. and therefor a direct cause of inflation.  Suddenly, there could be billions and billions worth of dollars in gold bullion hitting the market as the GLD is one of the top holders of gold in the world.  For the gold bulls, the good news is that this is not an alarm being sounded elsewhere by other market observers and it may never even come up as an issue.

Unfortunately this still leaves a question mark for beyond what is just the rest of 2009.  If you rate what economists, traders, and analysts all say on interviews and television report now compared to a month ago, that field is now looking just as split.  Dennis Gartman even sounded mixed in his latest call.  A final bit of insight here is that when these choppy patterns go into the technical no man’s land, it requires being right every day to be profitable.  What seems obvious now is that the straight line to $1,300.00 or $1,400.00 in gold is no longer one that is put in as a “definitely until told otherwise” status.

JON C. OGG