February 12, 2015
Below is an excerpt from our 2015 Yearly Forecast originally posted at www.speculative-investor.com last month. Excerpts from our newsletters and other comments on the markets can be read at our blog: http://tsi-blog.com/
Here’s the conclusion of our 2014 gold forecast:
“Based on the small historical sample size, which is all we have to go on, you should ignore the predictions that gold will zoom straight back to its 2011 top. This is particularly so considering that gold’s true fundamentals are mixed at this time (no longer bearish, but not yet bullish). Gold is likely to provide a good return in 2014, but even if a major bottom is in place the gold price is unlikely to trade significantly above $1600 and could have trouble getting beyond the $1400s.”
We were wrong about gold providing a good return in 2014, at least relative to the US$. In US$ terms gold was flat in 2014, although it did provide a good return in terms of every other currency.
In 2014 gold performed roughly as expected in US$ terms during the first half of the year, but then fell to a new bear-market low during the second half. The problems for the US$ gold price during the second half of 2014 were the perceived strength of the US economy (linked to the continuing upward trend in the S&P500 Index), the flattening of the US yield-curve (related to the perceived US economic strength), and the Dollar Index’s upside breakout from a long-term basing pattern.
The gold market has come to ignore the strength in the Dollar Index, because the US dollar’s rise on the foreign exchange market has come to be seen as more of a reflection of declining confidence in the ECB and weakening global growth than a reflection of improving US$ fundamentals. However, there is no evidence, yet, that the S&P500 has peaked. Also, the US yield-curve hasn’t yet signaled a trend reversal from flattening to steepening, and despite the problems in the ‘oil patch’ the general belief is that the US economy will make real progress this year.
There is never a good time to make a 12-month forecast, since forecasting is for the birds. But right now is a particularly bad time to make a gold forecast, the reason being that changes in other markets are needed to turn the gold market higher on a sustained basis and the needed changes may or may not be about to happen. Of primary importance, a sustained turn to the upside in gold almost certainly requires a sustained turn to the downside in US equities. Some long-term indicators are warning that such a change is in the works, but the S&P500’s price action hasn’t yet signaled anything of the sort. The first sign would be a daily S&P500 close below 1970.
If the S&P500 is in the process of rolling over to the downside on a long-term basis then it’s highly probable that gold bottomed last November and will generate the sort of performance in 2015 that we originally expected to happen in 2014. That is, gold will probably work its way higher over the course of this year with a top most likely occurring in the $1400s and with an outside chance of making it as high as $1600. The most plausible alternative is that the S&P500 will make some additional headway over the next few months and gold will drop to test its 2014 bottom during the second quarter of this year prior to a long-term reversal.
Gold-mining stocks will normally outperform gold bullion by a wide margin during the first 2 years of a new cyclical gold bull market. This is due to the fact that the cost of mining gold follows the gold price with a lag of 1-2 years. Due to this and depending on the length of the preceding gold bear market, the cost of mining gold will probably be in a downward trend at the start of a new cyclical bull market in gold bullion and will probably continue to fall during the first 1-2 years of a new bull market in gold bullion. A rising trend in the gold price combined with depressed stock valuations and falling production costs equals substantial profit-margin expansion and large gains in stock prices. Consequently, if gold made its ultimate bottom last November then the HUI should achieve a large percentage gain over the next 18 months in both nominal price terms and relative to gold bullion.
Of course, that’s a big “if”. Preliminary signs have emerged that the US$ gold price did indeed make its ultimate bottom last November (the non-US$ gold price having almost certainly bottomed way back in December of 2013), but we have been disappointed before. Last year, to be specific.
A long-term (that is, multi-year) bullish trend in gold mining stocks (as represented by the HUI) naturally requires a long-term bullish trend in gold bullion, which probably requires a long-term bearish trend in the US stock market (as represented by the S&P500 Index). A transition from a long-term bearish to a long-term bullish trend in the HUI and an associated transition from a long-term bullish to a long-term bearish trend in the S&P500 Index is our favoured possibility at this time.
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