No Market Moves in a Straight Line
AUGUST 15, 2019
AUTHOR: DAN PEMBLETON
In the last update, we talked about some of the reasons why the Gold Bull Market has started, the trillions of dollars of negative yielding debt in the world and central bank monetary easing being two very powerful drivers of investment into gold. In this update, I want to talk a bit about gold’s potential future price path and what we may expect in the near term.
No market moves in a straight line. Everyone knows that ups and downs are to be expected. This Gold Bull will not be an exception. In fact, some very smart people argue that this gold bull actually started in late 2015/early 2016, which saw a roughly 5 month rise in gold prices before consolidating below $1350 until just a few months ago. Regardless of the start point one chooses, there are now a growing number of people who see gold in a new bull market. This of course has the effect of moving gold prices and the price of gold stocks higher, as willing buyers at a specific price level increase and willing sellers decrease. This pushes prices higher. This is the basic market dynamic for all markets and is referred to as price discovery. It is the way a free market finds the “equilibrium” price that clears the market. I use the word equilibrium in quotes because equilibrium is not one price, it can be any price and that price constantly moves depending on the information and mood of the market at any second, minute, hour etc. I have been discussing this price discovery concept in the context of rising prices, but the same process works in reverse for falling prices.
Falling prices for gold in the next few weeks, or even a month or two, could be the next move. I think this may be the case because, as the price of gold has climbed, you start to run out of new buyers and the roster of willing sellers starts to grow. These sellers may be taking profit on what they intended as a short-term speculative position, or perhaps they are selling just a portion as part of a rebalancing. I also believe that the news flow regarding gold, and the fundamentals that support its price rise, will wane over the coming weeks. I believe this will happen because the news flow is controlled by editors and journalists whose job is to report on events or, in many cases in a 24-hour news cycle, find events to report upon. There certainly has been a lot to report on in the gold market and the bond market recently. This news flow creates and builds awareness, helping to influence investors both as buyers and sellers. What happens though after a number of articles have been written and published over a few weeks? The journalists and readers move on to new items. As an editor or journalist, you can’t write every single day about negative bond yields or its effect on gold or other markets. That just gets old for everyone and eventually gets you fired. The economic significance of the subject, which has been reported, may not decrease, but certainly the newness, originality of thought and the readership’s interest does. So, news flow tends to come and go in waves which helps to move the equilibrium prices of markets around. This is a main driver of why I expect gold prices to moderate in the coming weeks, while investors digest both their own positions with respect to bonds, gold as well as other recent developments. Meanwhile, the news machine will move on to other topics (probably the topics they moved away from to cover bonds and gold). The journalists will return however, probably for the October to December news cycle, as this gold market is in a long-term bull, based on powerful fundaments and will generate many new articles in the months and years to come.
What this means for Pavilion Flow-Through funds:
As investors, it is important to be aware of these cycles so we use them to our advantage where possible, and at least make sure that we recognize minor news-driven moves in prices separate from major fundamental-driven moves in prices so we don’t over-react to short term market moves. For Pavilion, this tells me that the expected price rally for junior companies coming out of the summer doldrums may be a bit reserved, versus what we have seen in the initial gold price move and in past bull markets, because of the timing of the summer doldrums putting the junior market a little off-cycle of the news. I will watch for gold and juniors to begin to move together a bit more strongly in the final quarter of the year, supported both by renewed positive news flow and strong fundamentals.
