Is the bull market in gold over?

By David Nelson, CFA

Rate hike fears and a strong dollar trashed gold this week driving down the metal and associated ETF’s to the lowest levels since Brexit. The inverse relationship between gold and the dollar is well documented hence the selloff in the yellow metal makes perfect sense in light of a rising dollar lifting at least partly on renewed fears of a rate hike later this year.


However, let me throw out another dynamic I’ve alluded to in previous posts that may also be weighing on precious metals. We may be in the early stages of a rejection of negative rates. Once again the German 10 year has closed above the zero line offering a staggering 2 basis points of return for those willing to tie up funds for 10 years. Who could pass that up?


According to Bloomberg back in June more than 500 million people were living in countries with rates in the red. One of the best comments from this article is not only does it hurt the banking sector’s ability to make profits but it may also lead them to take additional risks in the search of profits.

Of course the reasoning behind negative rate policy is to jump start inflation hence it has become a favored tool by some central bankers. To date, I see little evidence this very dangerous tactic is bringing results. With $Trillions tied up in negative rates gold seemed a natural place to park money for investors just looking to own a currency that could retain its value.

The Dynamic Duo – Abe & Kuroda
kuroda_abe_-_google_searchThis weekend Japan Central Bank head Kuroda is on record saying they can do anything they want to control the front and back of the curve. The arrogance of central bankers has long been a topic on these pages. Goldman in an analyst note said last month’s changes “effectively mean QQE to infinity.” (Quantitative & Qualitative easing)

To their credit while there is evidence that central bank policies have had some positive effects on GDP they are also learning the painful lesson that aggressive monetary policy continues to hurt Japan’s banking institutions and do so at their own peril. Traders will focus on these remarks especially on the heels of the drubbing the commodity and miners took last week.

Gold bulls have come out in defense of the metal especially chartists pointing to strong support at the 200 day moving average (see chart above). Given the sharp selloff and the fact it is oversold some sort of rebound could easily be in the cards.


However, a longer term chart of SPDR Gold ETF (GLD) shows a somewhat different picture. Despite the massive run off the bottom earlier this year (GLD) was rejected at the downtrend line and really needs to break to a new YTD high to take out the line in the sand. So, while gold could have a knee jerk reaction bounce off of clear support I think the proof is on the bulls to make their case.

If as I suspect we’ve seen the bottom in rates and are witnessing the early signs of a rejection of negative interest rate policy then the bull market in gold everyone seems so sure of may become a distant memory.

*At the time of this article some funds managed by David Nelson were long (GLD) and could choose to exit at any time.