Gold Prices Likely To Fall Further, And That’s A Good Thing

Gold has disappointed investors lately, and is likely to continue doing so.

Here’s what’s happening and why you should be happy about it.

Gold Prices Melting

The SPDR Gold Shares exchange-traded fund (Ticker: GLD), which closely tracks the price of bullion, has fallen 4.1% in the three months through Friday, compared to a gain of 7.3% for the SPDR S&P 500 (SPY) ETF, which tracks the S&P 500 stock index, according to data from Yahoo. The latter figure excludes dividends.

The bad news for anyone holding substantial quantities of bullion is that for the foreseeable future things aren’t likely to get better. In other words, gold prices will either languish where they are now, at around $1,465 a troy ounce or drop further.

Part of the reason that will likely happen is that investors are still overly bullish on gold.

“The specs [speculators] keep increasing longs, not decreasing them,” writes Rick Bensignor, author of the Bensignor Investment Strategies financial newsletter.

What he means here is that traders, or ‘specs’ in his vernacular, are placing more and more bets on the price of gold going up. He knows this because the Commodity Futures Trading Commission, which regulates futures markets, produces a weekly report detailing which way fund managers are betting.

Collectively speculators have more than six times as many bullish bets on gold than they have bearish bets.

“That keeps me bearish [on] gold,” he writes.

The reasoning works like so. When the collective bets overwhelmingly point in one direction, then the market price is likely to move in the opposite direction. At least historically, that’s how things play out across commodities markets.

In this instance, the current bullishness points to a coming fall in gold prices. Bensingnor sees prices going down below $1,435 soon, according to the report.

There are also fundamental reasons for investors to steer clear of gold for the immediate future.

The current outlook for stocks is looking far better than it did a few months ago. That’s partly because the Federal Reserve looks set to keep the cost of borrowing money low.

Most long-term investors prefer stocks and bonds to gold. They buy gold solely to brace their portfolios against economically calamitous times, such as when inflation is high or when there are wars between major powers.

Gold investors must pay to store and insure their bullion, and they receive no dividends from owning it. Put simply, gold is a bet made when investors are nervous. Right now they aren’t nearly as nervous as they were a few months ago.

Stocks Look Like A Better Bet

We know that they aren’t nervous because the stock market booming, reaching new highs with regularity this year.

The Dow Jones Industrial Average, which tracks 30 large-cap stocks, hit a psychological milestone by breaching 28000 earlier this month. In July the index hurdled 27000 for the first time.

JC Parets, who runs AllStarCharts technical analysis service, sees stock prices continuing to head even higher. A key plank in his reasoning is that the recent rally isn’t being driven by a few mega-stocks. Instead, a broader and broader group of stocks are seeing their prices surge. In the simplest terms, that makes it a broad-based rally which is a good sign for even more gains.

If you buy into Parets’ thesis, which makes sense a great deal of sense, then there is less of a reason to make big bets on gold prices rising. Instead you’ll see the stock market rising and gold prices falling.

But it also means that if you own bullion as part of a balanced portfolio, then your gains on stocks will far outweigh your gold market losses.

In other words, you should be happy.

Courtesy: FORBES