Is the Gold Rally Doomed?

Is the Gold Rally Doomed?

I have some really bad news to tell you. You know those big investment banks … the ones that just can’t wrap their heads around gold?

It turns out that they don’t hate it so much anymore. In fact, a few of them even love bullion now.

Imagine turning on CNBC last week and seeing a top strategist at JP Morgan expounding on the wonders of gold — “$1,400 an ounce is a cinch for 2016.”

But, wait a minute, why is this bad news?

Because it means that the great, glorious gold bull-market blastoff — the biggest such rally in 25 years — will soon take a well-deserved (though temporary) rest…

It’s all a matter of timing.

As a former Wall Street reporter, I made a career talking to people inside investment banks and large brokerage houses. Opinions don’t change, at least not quickly or easily. But when the price jumps 20% in a matter of three or four months, that tends to force the issue.

A committee meeting is called, and someone says: “What are we going to do about this thing with gold? It’s a rocket. We can’t keep telling clients to ignore the rally.”

If you’re famously anti-gold Goldman Sachs, you grudgingly announce (as it did last week) that you are raising your target price (while still maintaining that there’s “limited upside” to owning the stuff).

Or, if you’re Citigroup, which, as of late April, is now über-bullish on gold and other commodities, you say: “The flow of investor money back into commodities has happened much more quickly than we thought it would.”

But all of this takes time. Since investment bankers all look at the same charts, visit the same restaurants and don’t want to be too far out of step, they all tend to arrive at the same conclusion at roughly the same time.

So when a large bank or brokerage finally gets fully behind a new idea, such as “central banks are failing their mission — buy gold and gold stocks,” the proverbial train has already left the station. And the passenger cars on that train? They’re as crowded as a Tokyo subway at rush hour.

Gold Catches Its Breath

That’s why I believe that the sector is overdue for a pullback in price. The price of bullion is up more than 20% from last year’s lows, and the major gold stock indexes have doubled in price.

When any stock or commodity gets too wildly popular, it’s vulnerable to a sell-off. That’s especially so with gold after a sharp opening rally in a new bullish cycle, such as the one we’ve seen since the start of the year. You can find plenty of similar examples from the starts of earlier bull markets — 1986, 1993, 2001, 2008 — where gold pulled back 20% to 30% … and sometimes more.

It doesn’t mean the long-term rise in gold is over by any means. If you’ve gotten in on gold stocks or bullion, as recommended by The Sovereign Society’s own Jeff Opdyke and Paul Mampilly, congratulations — you’ll have a second chance to buy even more at lower prices.

But a sell-off — taking place over a period of days, weeks or months — is a necessary, healthy part of any enduring bull market. It clears out the speculators and unbelieving “weak hands,” and paves the way for much higher prices in the future.

Kind regards,
Is the Gold Rally Doomed?
JL Yastine
Editorial Director

4 comments

Gold has never traded at true price discovery based upon supply and demand fundamentals in this guys lifetime, and yet he pontificates:

“a sell-off — taking place over a period of days, weeks or months — is a necessary, healthy part of any enduring bull market.”

He probably believes there is something organic driving the markets as opposed to the endless market interventions we actually see. Just another brick in the wall.

How in the world, if big business is becoming bullish on Gold and I assume buying, can the price come down? Am I missing something?
But to add to the story the very next day, Gold and Silver Dropped big time silver by .79 cents that was same day the news of a more likely interest rate hike.
So just what did they really know before the general public. Hmmm.

I completely ignore the short term moves. The fundamentals behind gold and silver are like the 800 pound gorilla in the room. In other words, ignore them at your own peril.

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