NEW YORK (TheStreet) -- Gold bulls received a long-awaited reprieve Friday from falling prices in gold-related stocks. Volatility after the moves gold has experienced lately are expected, and some say welcomed compared to the stock market. Just be careful not to confuse a bear market rally with a bull market. We can look at where we are now and where we are headed to know why gold prices are not headed back to $1,800-plus any time soon.
Market Vectors Gold Miners ETF GDX
closed near the 60-day moving average at $46.58 up 6.5%; gold-price-tracking ETF
jumped over 4% to close at $157.50. GLD highs of the day came just short of the 60-day moving average, the near-term technical resistance level.
I shorted GLD twice on Friday. The first time I shorted GLD was in the afternoon near the high of the day. I covered the short about an hour later for a small gain. In the last 10 minutes of trading, I shorted again into the spike immediately before the price dropped again.
I like bear market rallies as the moves are generally strong and reasonably predictable. As anyone can see looking at a gold chart, prices do not move straight up or straight down. The volatility experienced can be unsettling and unnerving, even when it is expected. (Read why
Silver, represented with the silver trust ETF
didn't fare as well as gold, climbing just over 3% in Friday's trading. Gold- and silver-related stocks are barely above the lows of 2012, trading as expected in an economic environment void of inflation. Although some have a stronger grip on the doctrine of $2,000 gold than they do on economic reality, you should not buy into this sucker bet.
Lack of Inflation
Stocks are performing poorly in 2012, however, it's no wonder the
continues to beat the metals market. After all, companies are still making profits, with some paying handsome dividends. Gold bullion not only is void of dividends, gold and silver bullion has a net negative carry cost. Negative carry cost, while important, is not driving and silver lower. What's notable is the lack of inflation in the U.S. economy.
Inflation is the engine that drives the price of gold, silver and other metals higher.
Weak employment is not a cause but a symptom of the problem. Despite China's rise, the U.S. remains the largest manufacturer in the world. At the same time that Europe has funded much of their recent economic growth by spending beyond their means, so has the U.S., albeit, not to the same amplitude.
Many of the gold bulls are now beating on the quantitative easing (QE3) drum. Up until recently, inflation, a falling dollar, the declining U.S. empire and a whole host of other reasons were quickly provided as justification to move into gold. Gold bulls are now left hoping QE3 will save gold from its inevitable decline.
Gold is in a bear market and QE3 will not save it. How do we know this? Because, as so many gold bulls love to point out, gold is a storehouse of economic value. Gold's value is relative to everything else, and everything else is dropping or remaining the same in dollar terms.
Natural gas, represented by the U.S. natural gas fund
and oil represented by
are at or near 52 week lows.
Meanwhile everything else in the world is dropping in price also. Lower oil prices will drive gold lower with or without QE3, it's simply a matter of how much (read why
Money worldwide is quickly pouring into U.S. Treasury debt (not gold), currently the strongest flight to safety product there is. More than gold, more than oil, more than silver, the dollar is climbing in value and Treasuries are, for now, king. U.S. Treasury debt as measured with
iShares 20+ Year Treasury ETF
closed at 52-week highs on Friday. It's difficult to find a product representing the fear of inflation more than the TLT. The TLT trades inversely with inflation fears. In other words, based on the low yield of Treasury notes, inflation is all but dead.
To claim gold prices will move up because of U.S. debt is like saying a Hummer will provide less mileage because one tire's air pressure is half a pound too low. Yes, debt/QE3 matters technically; however, the issue is so overwhelmed from the plethora of other economic depressing factors QE3 has no practical impact, especially when viewed beyond the immediate impact.
The greatest impact expected from QE3 is in temporarily preventing the U.S. economy from contracting. A three-day-in-a-row rise in GLD, GDX or SLV should be viewed as a bear market rally and shorting opportunity. The TLT moved above $130 with the 10-year notes' yields dropping to post World War II lows, finishing at 1.62%. While I expect a technical pullback with TLT, it won't help gold or silver.
Don't get caught up in the day-to-day movements if you're a long term gold investor. With inflation, gold is able to maintain a bullish bias; unfortunately the pressure pushing down is greater than the pressure pushing higher. Gold will continue to lose appeal as long as energy prices are falling.
At the time of publication, the author was short GLD options, although positions may change at any time.