Gold is already having a rough year. Here's why it might get worse.
Gold continued its slow, sad march down on Monday, lower by 0.23% for the day and off 2.7% from the previous week. For the year, gold has lost nearly 24%. And, the future may be dim for the yellow metal, at least in the short term.
Steve Cortes, founder of Veracruz TJM, thinks gold's failed rally despite monetary easing from the three major currency centers makes bullion a bad bet.
The US Federal Reserve Bank has been adding billions of dollars to the monetary supply since the financial crisis half a decade ago. Since December of last year, it has been purchasing $85 billion worth of bonds each month from financial institutions in the hopes of stimulating the economy. This is slightly more than the ¥7 trillion in bonds the Bank of Japan buys to help push its own economy to grow. The European Central Bank, which doesn’t have a similar mandate to buy bonds like the Fed or the BOJ, used one of the few weapons in its arsenal it does have: it cut rates in half to 0.25% last week.
"I do not like gold at all here as an investment or as a trade," says Cortes. "If you look fundamentally, the world supposedly couldn't be any better for gold. You've got world central banks competing to ease more than the other, with the ECB being the most recent to join the party with the BOJ from Japan and, of course, the Fed here. You’ve had the dollar very weak over the last few months. That should be a recipe for gold to soar. And, yet, it isn't. It continues to trade lower."
Cortes doesn't believe the stimuli will have much of an effect on gold because they have barely moved the needle when it comes to inflation. In the United States, for example, the Consumer Price Index has moved up 1.2% in the last twelve months.
"There is no serious inflationary pressure in this economy and that's because wages are simply too restrained," says Cortes. "You need growing wages to really get inflation going. That's what we had way back in the 1970s. You have the opposite now. So, for that reason, I think avoid or even short gold."
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, agrees with Cortes on the short-term.
"I'm not going to bash gold [in the] longer-term," says Ross. "Perhaps there's a case as Peter Schiff has alluded to several times on the way down. But, when you look at the short-term, the technicals [are] clearly eroding."
For Ross, the inability of gold to break above its 150-day moving average is coupled with a head and shoulders pattern in charts point to a bearish move. And, Ross warns, there may be an additional reason why gold will get hit at in the next two months.
To see Cortes and Ross discuss what's next for gold and why Ross sees a sell-off soon, watch the video above.
More from Talking Numbers:
- Budget, Tax & Economy