A Bigger than Expected Downturn
The recent downturn in gold and gold stocks has become bigger than we expected. We basically thought that gold might correct to the support area around $1320 and then resume its rally to test the interim high around $1420 to 1430 that was reached last August. Clearly that has turned out to be an overoptimistic assessment.
One hint that things may turn out otherwise was probably the fact that gold stocks turned down again very shortly after making a standard upside move from a small triangle/pennant, which is usually a bullish continuation pattern. Often when bullish (or bearish) formations fail, there is a tendency for prices to overshoot in the other direction (see the GDX chart further below).
From a fundamental point of view, it was perhaps an unfortunate coincidence that the loss of the ‘Ukraine premium’ happened so shortly before the latest ‘taper scare’, whereby the biggest problem about the latter was apparently the fact that Ms. Yellen announced a time plan for the Fed’s eventual hiking of interest rates. Of course, such a time plan is nonsense anyway. No-one knows what monetary policy will be more than a year from now, least of all the bureaucrats running the Fed.
Let us not forget that their policy is a rule reactive, i.e., they are like someone driving a car forward while gazing intently out of the rear window all the time. As we have pointed out on occasion of the most recent FOMC announcement: bureaucrats are as a rule not the best economic forecasters. If they were actually good at this kind of thing, they would be running a business, not a bureaucracy. In fact, if one looks at the transcriptions of their meetings, which we hoi-polloi for unfathomable reasons only get to see with a 6 year delay, then the one thing that stands out like a sore thumb is how utterly clueless they often seem to be. Mind, this is not something new. If one looks at transcripts from as far back as the 1930s one will find that they were just as clueless then as they are now. It is apparently in the nature of the job. Of course this does give one pause. One wonders why anyone would think it a good idea to give these people price fixing powers allowing them to manipulate one of the most important signals actors in the economy employ for the purposes of calculation and coordination.
However, that is neither here nor there – the important point we want to make is only this: gold market participants evidently got cold feet over what seemingly amounted to guidance about the presumed coming tightening of monetary policy. However, this reaction made just as little sense as announcing the rate hike time plan did. Market participants should know how meaningless such statements are.
