Capitulation in the Gold Market?

07/04/2013 8:30 am EST


Jim Jubak

Founder and Editor,

Historically it has been a very rough quarter for gold, and MoneyShow's Jim Jubak thinks that the current liquidation may be important.

The second quarter has been a really bad quarter for gold. Gold’s going to wind up down 25%; we’re going to wind up with gold somewhere around $1,200 or $1,225. Remember that it was $1,800 as recently as the autumn of 2012. This is a huge slide.

The good news at the end of the quarter is that you had a lot of selling that felt almost like liquidation. In fact, I think it was liquidation, yet a lot of people were holding on, holding on, holding on...they got to the end of the quarter and said, “I don’t want to show this on my books.”

We had massive selling, and I think we saw capitulation, liquidation, whatever. It's the kind of wave of selling you get when prices are really as low as they’re going to go.

I don’t know that prices are as low as we’re going to go. It really depends on central bank policy and inflation, but...Goldman Sachs was still out there saying, “We think our clients should short gold.” They were saying, “Well, gold is going down to $1,050 by the end of 2014.”

That doesn’t mean there can’t be bounces in between, but think about just those huge numbers of $1,800 in the fall of 2012, $1,225 or  $1200 now, and $1,050 at the end of 2014. I don’t necessarily want to buy gold at this point, but I think if you’re shorting gold, you can look at this and go, “OK, I’ve made the easy money. The easy money was from $1,800 down to $1,200 or $1,225, and now Goldman is telling me to be bearish, and they’re only looking at a decline from $1,200 or $1,225 down to $1,050 over the course of the next 18 months.” That’s not as attractive, certainly, as a slide from $1,800 to $1,200.

I think we’re looking at a time when maybe the end-of-the-quarter capitulation means that you’ve got a lot of shorts deciding that gold is not worth shorting anymore, that the easy money has been made. This is not necessarily what you get, a condition that you need to have to produce a rally, but it’s certainly the kind of thing you need—the kind of thinking you need, the kind of change in psychology that you need—to put in some kind of floor, maybe around $1,200 and maybe around $1,050.

I think we’re closer to a floor than we are to another huge drop, or to a huge rally.

Related Reading:

Is Gold Trying to Warn Us?
Should You Hibernate with Gold Bears?
What to Do as Bonds Crack

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