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Declines in Gold Prices Are Not Over Yet

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The bottom in gold appears to be a few weeks away, which gives the market plenty of time to move lower.

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These past few weeks it seems like paper gold is out and physical gold is in.

The fall in the price of gold has triggered a new run on physical gold that shows no sign of abating. Record amounts of money have exited 'paper,' i.e. futures and ETFs, and headed straight to the bank or the mint to be exchanged for coins and bullion bars -- that is, if one can get them. The strength of physical retail buying has taken dealers and mints around the world by surprise, leaving them scrambling to keep up with demand. The sudden surge is evidence of pent-up demand, particularly from China and India.

There seems to be a growing disconnect between paper and real gold. It's very likely that the paper sellers didn't foresee the rush to physical gold. Could it be the case that the physical market is lagging behind and will eventually catch up and sell off too? Let's look at some of the evidence.

Physical Gold, an investment company, said there were waiting lists of three weeks for some coins, and four to six weeks for gold bars whereas previously all would have been available within a few days.

The US mint had to suspend sales of certain coins as buying increased. It sold an estimated 210,000 ounces of gold coins in April -- almost three and half times more than the 62,000 it sold in March.

The Perth Mint worked overtime over the weekend to manufacture enough stock to meet orders, which are at levels last seen in the 2008 financial crisis (confirmation of the 2008 - present analogy).

There are reports that both Istanbul and Dubai are out of investment bars, according to Bloomberg, with wholesale and bulk buyers paying a premium of between $6 and $9 an ounce for kilo bars.

A US coin shop said that sales of Krugerrand have increased 468% last week as investors rush to get the precious metal at what they see as a bargain rate.

The Financial Times wrote that Asia is witnessing one of the strongest waves of physical gold buying in 30 years. "Buyers Scour Asia for Physical Gold," proclaimed the headline.

Swiss refiners have run out of kilo gold bars (cost: around $48,000). There is now a one-month wait for delivery.

Physical stocks of gold held at CME Group's (NASDAQ:CME) Comex warehouses in New York have dropped to a near-five-year low in a further sign that gold's price crash unleashed a frenzy of demand, according to a Reuter's report.

Well…you get the point. The gold bugs are coming out of the woodwork and they want the kind of gold they can bite between their teeth. World over, private investors have taken advantage of the dip to pounce on physical gold. Keep in mind that there is some effort that goes into buying physical gold. It's not like placing an order online for the purchase of ETF shares. Most physical gold buyers are not in it for the short term -- they plan to hold on.

At my firm, we have always advocated physical gold over the paper kind for long-term investments. If your investment time horizon is more than a year, you want to purchase the physical metal, not somebody's promise to pay you some money down the line based on the price of the metal. For short-term trades, however, ETF shares are OK.

To see what is in store for the price of gold in the following weeks, let's turn to the chart section. We will start with the yellow metal's medium-term chart (charts courtesy of http://stockcharts.com).


Click to enlarge

A closer look shows us that gold has actually corrected to its previous support level (declining, dashed line) and verified this as resistance. At this time, it could just be a pause within a rally, but generally the main short-term trend here is down, although we have had a correction of about one-half of gold's recent decline. It seems now that the move to the downside will continue and the RSI suggests this is clearly possible. It is no longer oversold and is pretty much in mid-range levels. Moreover, in last week's essay (Gold Charts Suggest Decline Is Not Over Yet) I discussed the importance of long-term cycles on the gold market – the cycle suggests further declines and formation of the final bottom in the next several weeks.
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