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The Alternative Answer Daily

Recent Rally Unlikely to End Gold Downtrend

Gold has rallied to $1254 an ounce (on the spot market) from $1218 on December 2. The December 2 closing low was the lowest close for gold since it closed at $1201 on June 27, 2013.

But I don’t think the recent rally is likely to run very far. It’s based on what is likely to be a temporary retreat in the dollar on fears of a Federal Reserve decision on December 18 to begin tapering off monthly purchases of $85 billion a month of Treasuries and mortgage-backed securities.

And the folks who run gold mining companies aren’t showing signs that they believe tough times for the precious metal are over. For example, on December 11 gold miner Iamgold (IAG) announced that it was suspending its dividend to, in the company’s words, “preserve our balance sheet.” Suspending the dividend will conserve cash as the company cuts costs (by another $100 in 2013, the company projects) and waits for the turn in gold prices. Iamgold did note that it still has $750 million available on its credit facilities.

The problem for gold and gold mining companies is that investor demand for gold is in a continuing downtrend. ETF investors sold 700 metric tons of gold—the equivalent of a third of global gold production– in the first nine months of 2013. Initial data for November show outflows of an additional 47 metric tons, according to Barclays. That’s after a similar drop in October

The real danger, according to Barclays, is that a drop below $1200 an ounce would trigger additional selling since at that level more positions fall into the red.