Gold’s rise: “Not if but when” - Nichols

U.S. gold commentator Jeff Nichols reckons that for the current week the odds favored a further rise toward the top of the recent trading range, and possibly even a break through to higher territory. Nichols does warn that gold's upwards path is likely subject to the occasional major correction.

Author: Lawrence Williams
Posted: Monday , 12 Aug 2013

In an email to Mineweb on Friday, U.S. gold commentator Jeff Nichols reckoned that for the current week the odds favoured a further rise toward the top of the recent trading range -- and possibly even a break through to higher territory. Early trading today seems to be supporting that view. The precious metals certainly seemed to be showing a bit more mettle as last week progressed, with silver doing better than its yellow sibling, at least in percentage terms- a trend which continued this morning with it breaking through $21 for the first time in nearly eight weeks, while gold moved back up through $1,330.

However Nichols also notes that the past week’s gold-price action has been a stern reminder of gold’s continuing vulnerability -- and its potential strength. On a positive note, physical market fundamentals remain supportive while overly negative sentiment indicators suggest the market is oversold.

It is particularly hard to predict the gold market at the moment. As Mark Bristow of Randgold Resources commented in his presentation to analysts on the company’s Q2 figures, gold analysts at the major banks and financial institutions have virtually never got their predictions right. In our view they tend to be reactive to the immediate past performance of the metal prices and seldom manage to pick the turning points.

The major gold bulls did have a long period in the sun with their forecasts perhaps even being exceeded in some cases, but did not predict the major downturn of the past two years and have been quick to apportion blame to manipulation by central banks and their bullion bank allies for markets not returning to their predicted strong upwards trend. Meanwhile gold’s detractors have been looking on the falls as confirming their opinion that gold was in a bubble, has no place in the modern financial system and would crash back to from whence it came. Over-optimistic bulls and over-negative gold bears – was it ever thus?

Nichols, perhaps one of the more sober of the bullish fraternity, has always warned of gold’s upwards path being likely subject to the occasional major correction, although the strength and depth of the fall of the past two years was perhaps stronger and deeper than he was expecting. But once the momentum gets under way – upwards or downwards, it becomes self sustaining. In this case the most recent falls, Nichols avers, have been due to a small number of major bullion dealers and institutional traders driven by computer models and momentum indicators.

 These players continue to find success, selling at key chart points, then taking profits as less prescient small-scale speculators come late to the game, he comments.

So it would seem, he says, that gold remains range-bound, though perhaps within a gradually narrowing range. Gold prices are still in a lengthy “bottoming phase” and may have more work – technically speaking – before breaking through overhead resistance and moving substantially higher.

He also points out that this can be a dangerous time of year for both gold bulls and gold bears. With many of the traders and fund managers taking their holidays, trading is traditionally thin and movements can be magnified. It should be recalled that gold’s big run up to its 2012 high point, for example, happened in late August and the first couple of days of September. However, immediately after the U.S. Labor Day (the first Monday in September), traditionally the end of the summer holiday, the big decline in price began!

Overall though, Nichols goes on record as confirming his view that “the risks of a major lasting downward gold-price correction are significantly less than the possibility of a quick bolt into higher territory and the re-establishment of the long-term bullish trend. To my mind” he says, “the question is not “if” but “when”.

Gold will likely to continue to move up and down on the vagaries of statement from the U.S. Fed and Ben Bernanke with regard to the latest buzz word – ‘tapering’ – in other words a reduction in the Fed’s bond buying programme. However much of the downside element of this has probably already been built into the gold price. It should be recalled that gold was on a strongly rising path before the ‘Quantitative Easing’ moves had even been contemplated the same could be true today from a much higher base. The bulls may well have their day again, and that day may not be too far off.

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