With oil surging and gold and silver rebounding, today top Citi analyst Tom Fitzpatrick sent King World News four incredible charts and commentary covering the gold market. Fitzpatrick takes KWN readers through a fantastic look at the gold market as only he can, and KWN readers around the world will enjoy this extraordinary piece.
Here is Fitzpatrick’s piece along with 4 tremendous charts: “(Below is an article covering gold from the) New York Times, 29 August 1976 (3 days after the corrective low had been posted in 1975-1976 before Gold started a 3 year rally into late 1979/early 1980):
“Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.
The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold‘s allure.
Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.”
The above note is probably a close representation of consensus market view at the moment.
We are biased to believe that the low in this correction may have been posted for Gold. However it is early days and we need to see some more positive price action to support this view.
– Crude has consolidated but still looks bullish overall
Between 1973 and 1974 the DJIA fell 45%. As the Equity market then recovered Gold went into a corrective phase within 3 months that saw it fall 445 as the Equity market rallied.
This time around gold has in fact been much more resilient.
– It did not peak until Sept 2011 (2 1⁄2 years after the Equity market bottomed out).
– It has so far corrected 39% with an Equity market that has rallied 140% off the March 2009 low (DJIA). In 1975-1976 it corrected 44% as the equity market rallied 76%.
“In 1976 the Gold correction ended in August and the Equity market began a deep correction in September (27% over 18 months). During that period Gold rallied by about 78% and over the 1976-1980 period it multiplied in value by a factor of 8 from just over $100 to over $800. The final part of that rally saw Gold rise from about $470 to $850 over about 4 weeks on the back of the USSR invasion of Afghanistan. Even without that move it still multiplied by about 4.5 times in just over 3 years.
So what are we looking at to increase the likelihood of the low being in?
In addition, daily momentum is turning up from more oversold levels than those seen before the $270 bounce in 2012. On a daily chart this is the most oversold we have Been since the turn higher in Gold in 2001.
It has become very stretched to the 55-and-200-day moving averages which now have a big gap between them.
An important thing to note is that Gold broke its support level the same week as the S&P broke above its 2007 high. As long as the equity market stays resilient (As we saw in 1975-1976) it may be a drag on Gold’s ability to rally substantially. In the 1980-2000 period when financial assets were aggressively rallying, Gold took a back seat. We may need the market to be more concerned about the financial/economic backdrop before Gold can get any real traction again.