We have been preparing readers for a potential large downdraft in gold for the past several weeks:

May 12th - 3 Reasons Gold Could be in for a Summer Swoon 

May 20th - Do the Gold Miners Have a Pulse?

May 23rd - Will This Time Be Different for Gold?

This morning with gold down nearly $30/ounce a summer swoon is becoming a reality. Technicians have been quick to point out the breakdown from the symmetrical triangle and the potential for much lower prices ahead.

While this is all true and the path of least resistance certainly appears to be lower over the near term. Let's take a step back to analyze some of the fundamental reasons that have led to gold becoming so out of favor during the last 14 months:

  • Continued subdued levels of inflation along with the belief that potential long-term inflation is much lower than was previously thought just a couple years ago have removed one of the key underpinnings of the long-term gold bull thesis (high/hyper-inflation).
  • The recent phenomenons of constant central bank interventions and historically low market volatility (particularly in currencies and equities) have led to a pervasive belief that 'tail-risk' is very low.
  • Portfolio managers have reduced gold allocations en masse as they chase returns in a high return equity market environment.
  • The 'postponement' of a dollar armageddon scenario.
  • An increase in global gold mining production during the past five years has led to an increase in the marginal gold supply

Gold_mining

The above mentioned fundamental reasons along with the current badly damaged technical structure of gold have resulted in the current period of "cheapness" in the gold price. While the financial media will certainly sound the bearish alarm bells for gold, long term investors should use the summer doldrums to continue adding to long term positions. The following quote from Howard Marks reminds us a lot of the current gold market backdrop.......

"When everyone believes something is risky, their unwillingness to buy usually reduces it’s price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing since all optimism has been driven out of it’s price."