For years, all we have been hearing about was how gold was going to soar because various countries were buying gold. The greater part of the fundamentalists in this market were convinced that this was a bullish signal, and that the decline was going to reverse due to this buying. Yet, gold continued to plummet, despite all this buying, and in the face of the significant majority expectation to the contrary.
But, during the same period of time, I have been waiting to hear about how countries are selling their gold. To me, THAT would be a bullish indication, as it would likely mark the point in time that we are nearest a long term bottom. Let me explain why.
Back between 1999-2002, Great Britain sold approximately half of its gold reserves. But, when they concluded their sale, guess what happened? Yes, gold began its parabolic climb from just below 300 to over 1900 within 9 years. In fact, that bottom in gold became dubbed the “Brown Bottom,” named after Gordon Brown, the UK Chancellor of the Exchequer, who made the decision to sell the gold at that time.
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.
This past week, I read an article noting that Venezuela could be selling more than 3 million ounces of its gold reserves before year end. They have 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, they may not be the only oil-dependent country that may be forced to sell gold in the last quarter of 2015.
While the 12 million ounces of gold sold by Great Britain at “Brown’s Bottom” is clearly more than the 3 million ounces that Venezuela may sell, recognize that Great Britain’s proceeds from its sale were estimated around $3.4 billion, whereas the Venezuela sale would likely net around $3 billion.
Additionally, it seems that the major players within the gold market have turned quite bearish. At September's Denver Gold Forum, a panel of gold industry experts came to a strong consensus that gold is still overvalued and would likely fall below $1,000 perhaps to around $800. Moreover, at the LBMA/LPPM gold conference in Vienna, an expert panel discussion on gold came up with almost an identical consensus. They also expect that gold will drop below to $1,000, and perhaps down to $800 or less.
In a recent article published on KITCO, I had written the following:
One has had to search quite hard to find a point of neutrality in the metals market over the years. If one had performed a search in the past, they either encountered gold bugs, which are super bulls, or gold haters, who believe that gold will never be a good investment.
But, as of late, we have developed a new class within the metals market. This new group is generally bullish on this complex for the long term, but they are certain that one should not even consider buying until we see a strong capitulation with a spike down below the $1,000 level. I call them the “below-1k-dip-buyers.”
Now, I have to be honest and admit that I proudly considered myself within this class of investors not too long ago. In fact, even before the market topped within $6 of my target back in 2011, I suggested that the correction can take us down as low as the $700-$1,000 region, despite the mass disbelief at the time. But, as this “below-1k-dip-buyers” class has grown quite large, I am now questioning the wisdom of such affiliation.
These recent events somewhat bolster my argument that the bottom to this market may be closer than most believe, and it may not drop as deep as many believe. As the next, and final, decline takes hold, we will be able to pinpoint the target more accurately. But, I have been having strong doubts about whether gold will actually break below $1,000 with so many believing it is almost a certainty. Remember what happened back in 2011 when almost everyone (other than yours truly) believed that it was a virtual certainty that gold was going to exceed $2,000? As the late Yogi Berra would say, is this "deja vu all over again?"