NEW YORK (TheStreet) -- The gold bulls had an impressive run. Like the start of 1980s attempt at $1,000 an ounce, September of last year almost made it to the psychological $2,000 mark.
"History may not repeat itself, but it sure rhymes a lot" (thanks, Mark Twain). It's difficult to find a statement that captures the bull and bear markets better. Yet, even with falling gas prices, a stronger dollar, fiscal crisis in Europe, dropping demand for bullion, lower commodity prices and a downgrade of Japanese debt, some believe inflation is around the corner.
Inflation of course is the result of greater dollars chasing relatively fewer goods. It's easy to see the impact of inflation with the price paid at the pump, the grocery store, housing and labor costs. You don't have to take my word for it, government reports state the same.
From the latest Consumer Price Index report (April 2012):
The 12-month change in the index for all items was 2.3 percent in April, the lowest figure since February 2011. The index for all items less food and energy also increased 2.3 percent over the last 12 months. This is the first time since October 2009 that the 12-month all items change has not exceeded the 12-month change for all items less food and energy. The food index has risen 3.1 percent over the last 12 months, and the energy index has risen 0.9 percent.
Granted, I understand, if there is one thing a true gold bull doesn't place a lot of faith in, its government reports. But you don't have to believe the report: A trip to the gas station and last winter's heating bills tell the story just as well.
For that matter, it doesn't take much more than a look at the Gold Miners to understand what the situation is for gold. Take a look at gold ETFs like
Vectors Gold Miners
Junior Gold Miners
, and the
iShares Gold Trust
to understand the pain investors are enduring with gold-related stocks.
Starting with the monthly chart, GDX has broken trend line after trend line and a target price of under $32 before the current trend line break fulfills. The weekly chart displays the 60-week moving average crossing below the 90-week moving average along with many other bearish technical indicators.
Gold miners comprising GDX and GDXJ are hurting because as demand falls, so does their profits. While many miners sell future production causing a delay between falling gold prices and stock prices, it eventually catches up. If recent falling gold prices actually signaled a buying retracement instead of a complete shift, I would expect gold bullion sales to increase as price recedes. Instead, prices are dropping right along with demand, a striking bearish indicator.
Buoyed by Hope
Many investors have failed to see that lower highs and lower lows equal a shift from a rising market to a falling market. However, confirmation bias explains perfectly what gold bulls are thinking.
Confirmation bias is a mental process of assigning greater weight to confirming information regardless of how ridiculous and baseless it is, while at the same time assigning lower weight to any information that contradicts an already established opinion.
When I read silly things like a Greek default and monetary easing in Europe will lead to higher gold prices I have to wonder if they believe it, or if pundits are talking their book. Either way don't bet on it.
I predicted that a Greek default
last year, after the "problem was solved," and that it will involve large loss write-offs for Europe as a whole and French banks in particular.
Europe has borrowed and spent like a mad hatter holding an American Express Black Card. The spending limits were set too high, and the bill has arrived, leaving politicians wondering what to do now. Sadly, it didn't take many countries long to mortgage away their kid's future.
Don't expect inflation fears in the eurozone anytime soon. Declines in currency exchange value will more than offset continental inflation. The net gold impact is bearish absent a strengthening of the euro against the dollar. With upcoming markdowns in loans, I would expect the Titanic to finish its voyage before European monetary changes create a bullish case for gold.
Not to be outdone with debt burdens, Japan has mortgaged everything down to the chopsticks for the remaining few in the next generation. Japan now sells more adult diapers than infant diapers as the population ages and the birth rate remains well below the replacement level needed. Japan, with well over 200% GDP debt level is near forced austerity, even if they don't admit it yet. The yen is near record strength against the dollar, a fall in the yen/dollar pair will, like the euro, result in bearish pressure on gold. Moving forward, increasingly anticipate Japan as a bearish catalyst for gold.
As I wrote in a recent article about oil leading the way for gold, falling energy prices are the final stake in the heart of inflation. The
US Oil Trust
continues to make 2012 lows. Everything in the world depends on cheap energy, and cheap energy is here. Please read my article
for my outline of why lower energy prices have killed inflation fears.
Along with USO, natural gas is also at historic lows. Natural gas is so incredibly cheap, trucks are actively moving away from diesel and gas to burn natural gas. A quick review of the monthly
US Natural Gas fund ETF
clearly indicates the current level of inflation fears.
I apply several proprietary technical analysis indicators as well as my favorites by Tom DeMark to arrive at price projections. I use several indicators for confirmation, and one relatively easy back-of-the-envelope method is described in Jason Perl's book
. The high above the GLD monthly trend line is $185. Subtracting the value of the trend line for the same bar ($141) results in a difference of $44. Then subtract $44 difference from the trend line value at the price break. The price broke the trend line this month at about $158; $44 from $158 results in a price target of $114.
More convincing yet is the weekly and daily gold charts. Gold broke through this month and is now trading below the 60- and 90-week moving averages for the first time since January 2009. Look for moves higher in GDX, GDXJ, GLD, and IAU as selling/shorting opportunities.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.