Surprised on the yellow metal's drop? Don't be, says Matein Khalid
Gold's fall to $1,085 an ounce should not surprise readers of this column. I have been bearish gold since the $1,750 levels in 2011-12. In fact, I published a column a month ago, when gold was trading at $1,165, predicting that gold will fall to $800 an ounce. The yellow metal is no longer a precious metal but investment leprosy in the world of mid-2015. Why?
One, rising interest rates are to gold what sunlight is to Count Dracula - a kiss (bite?) of death. After nine years of Zirp, the Yellen Fed is on the verge of the first rise in the Fed Funds rate this autumn. With 17 million auto unit sales, 1.1 million housing starts, 12 million new jobs, record highs in the stock market and a 5.3 per cent unemployment rate, the US economic supertanker is on a roll.
I can easily envisage six to eight interest rate hikes in the next monetary cycle. As the opportunity cost of holding gold rises, its price falls. Elementary Macro 101, my dear Watson.
Two, the Greek deal with the Troika, the Chinese stock market "bailout" and the Iran nuclear deal have all made the world a less dangerous place - for now.
Gold cannot be a hedge against geopolitical risk if it moves to new lows while four civil wars and several terrorist insurgencies rage in the Middle East and North Africa. Gold once bottomed at $296 an ounce in 1982. Is gold a geopolitical hedge? Poppycock.
Three, the commodities supercycle is as dead as Nineveh and Babylon. Commodities as diverse as crude oil, copper, iron ore, aluminium to nickle and zinc are in vicious bear markets as global growth slumps, Chinese demand fades and King Dollar goes on a rampage.
Four, the collapse of gold accelerated in mid-2014 when the US Dollar Index began its epic breakout at 78 and I began to plead with readers of this column to short the euro at 1.3650. This accelerated the selling pressure in gold. The City grapevine argues that major hedge funds and Asian central banks are selling gold. John Paulson, who made a $4 billion killing shorting subprime mortgage debt in 2007, lost 90 per cent in his gold fund. Any investor who ignored my warnings not to bottom-fish in gold since 2011 is well, no longer an investor. How to make a small fortune in gold? Start with a large fortune.
Five, we saw liquidity shocks in the gold market, since a single sell order in Hong Kong sent bullion plummeting to $1,090. This means the dealer banks are no longer risking their capital in this niche OTC market. Brace yourself for major price declines as gold volatility creeps higher this autumn. My call? $800 by mid-2016.
Six, Chinese gold reserves at the People's Bank of China in Beijing are now 53 million troy ounces, up 60 per cent since the failure of Lehman Brothers. I expect world's biggest bullion buyer to turn into a seller this autumn. No brownie points for guessing what happens to the grassland when the biggle elephants begin their stampede. Joe Chow Mein (Chinese retail) has been savaged by the Shanghai/Shenzhen stock market crash.
Seven, in the age of Modinomics and punitive gold import taxes, Indian retail investors have also been savaged by the 40 per cent bear market in bullion. There is also no credible investment case for jewelelry as long as Dalal Street mints rupees.
Eight, CFTC data tells me that the smart money is positioning for the biggest short speculative assault on gold futures I have ever seen. This means my $800 target is far too vulnerable.
Nine, there is at least a 20-25 per cent downside in Dr Copper and crude oil. Gold cannot rise when commodities tank; the last gold bear market (1980-97) lasted 17 years. This one has barely begun.
Ten, hedge funds are net short gold for the first time ever. Gold exchange traded funds worldwide have sold $5 billion since 2013. Goldbugs are a cult in serious denial as they bleed and die on margin