Do We Have Another “Brown Bottom” In Gold?

In October of last year, I wrote an article discussing a contrarian indication seen at the last major bottom in gold in 2002.  I noted how, for the last 4 years, many were claiming, week after week, that governmental demand for gold was the reason gold was about to soar.  Yet, gold continued lower and lower despite wide expectations to the contrary based upon such governmental buying. 

However, in my article in October, I suggested that when we begin to hear about governments significantly reducing their gold reserves, rather than increasing them, we will likely be nearing a long term bottoming in the metal. 

“You see, governments are usually the last actors within a sentiment trend.  Think about it.  Aren’t governments enacting new laws to protect investors at the end of bear markets – after all the damage has already been done?  So, it is not unreasonable to believe that governments would be the last sellers to the market to conclude a bear market.   And, this is why I have been awaiting news of a government selling its gold reserves to represent the culmination of a selling trend.”

The last bear market in gold lasted from 1980 until 2002.  Between 1999-2002, when gold prices were at their lowest during the bear market, Gordon Brown, who, at the time was the UK Chancellor of the Exchequer, decided to sell approximately half of the UK’s gold reserves.   As we now know, that marked the end of the gold bear market, followed by a strong rally into 2011 which saw gold increase in price by over $1,600.  The price multiplied by over six fold from the low in 2002. This became known as the “Brown Bottom.”

Just the other day, many have been noting how the Bank of Canada’s gold reserves have been reduced to nothing.  Yes, you heard me right.  The Bank of Canada no longer has any gold. http://www.bankofcanada.ca/rates/related/international-reserves/  I would consider this akin to the “Brown Bottom” which marked the bottoming of gold back in 2002.

Moreover, since the end of last year, we have been hearing about how Venezuela will likely have to sell its gold reserves in 2016. As I noted in my October article:

I recently read an article noting that Venezuela could be selling more than 3 million ounces of gold reserves before year-end. The country has more than $5 billion in maturing debt and interest payments due before year-end without the ability to repay it. And with the price of oil likely heading further south, it may not be the only oil-dependent country forced to sell gold in the last quarter of 2015.

And, in January of 2016, it seems that Venezuela sent $1.3 billion worth of gold bars to Switzerland, according to data from the Swiss Federal Customs Administration.  In fact, it seems that the Central Bank of Venezuela has reduced its gold holdings in 2015 by 25%, and this is even before hearing about this transfer in 2016. http://money.cnn.com/2016/02/25/news/economy/venezuela-gold-debt/index.html 

While many have been pointing to the demand in China, India and Russia as the reason gold was supposed to rally over the last 4 years, gold has continued lower during that time.  But, I have been patiently awaiting news about governments selling their gold as an indication of a major bottom in the market, at least from a historical and sentiment perspective.  I believe when we look back years from now, 2002 and 2016 will both represent major bottoming points in a very long term uptrend for gold. 

And, while 2002 became known as the “Brown Bottom,” 2016 may yet become known as the “Maple Leaf Low.”