Jim Rogers: Gold Sell-Off To Continue

How Far will Gold Correct?

Written by Joseph Carducci
Posted July 10, 2013 at 3:01PM

We have seen something historic in the gold market recently. While the metal has been known for its volatility, we have now seen the second largest correction in history.

From its high of $1,895 on September 6th, 2011 gold has now fallen 37 percent. The largest gold correction on record occurred between 1975 and 1976, with a 44 percent tumble. After this, the price went on a tear and multiplied over 8 times in a three year period.

GOLD OUTLOOKAll of this begs the question as to when the price of gold will stop correcting and begin moving up again. Could the correction now be over? There are certainly opposing viewpoints on this.

Deutsche Bank (NYSE: DB) feels the correction is over. It recently cited the policy of the Federal Reserve, especially quantitative easing, as providing a strong headwind to the price of gold reversing and resuming its multi-year uptrend. Strangely, it also cut its forecast on gold calls.

Other experts see the position of gold today as very similar to its bottom in 2008. The factors contributing to this situation are valuations of mining companies at record lows, strong macroeconomic reasoning, and very low sentiment.

Then again, noted investor Jim Rogers has stepped into the fray, clearly disagreeing with all of these experts.

Why the Gold Correction is NOT Over

Jim Rogers is one of the most famous and widely followed investors. He has also been very vocal about his belief that gold prices are in an overall bull market.

According to Business Insider, he began warning investors back in 2011 that gold would correct. As the yellow metal was reaching its new highs, Rogers was telling anyone who would listen that a correction was in order and that this could take prices down to the level of $1,200 or so.

His reasoning for this? The fact that gold had already gone up 12 years at that point on a year-to-year basis. Although he is slightly cryptic in his reasoning, the idea that nothing could continue moving upward forever seems to be the driving force behind this argument.

Now, Mr. Rogers has been saying the gold price correction is not over. He feels prices could fall to as low as $900 and that gold is in the process of forming a 'complicated' bottom. Of course, it is difficult to say exactly when we will see this final bottom, although he feels it is unlikely before at least 2014. In fact, even Mr. Rogers does not seem quite sure as to the when – but he's sure it will happen.

Another interesting reason many feel gold is not done correcting is the fact that gold still has a lot of believers. There are people who feel the price is being manipulated. The process of creating this final, corrected bottom needs to shake most of these folks out of the market first. Then the price of gold will resume its upward trend. And, yes, Jim Rogers does feel gold will make new highs, going back above the $1,900 level.

Barclays (NYSE: BCS) analysts also tend to agree with Rogers' basic assessment. Gold has not been benefiting from the recent violence in Egypt, which has tended to weaken the argument of gold being a safe haven. Also, the physical demand for gold is weakening. Not to mention the fact that ETFs have been dumping their gold holdings in recent weeks and months.

Which Holdings will be Hit

As the market continues to correct, one of the hardest hit areas will likely be gold ETFs. In fact, we are already beginning to see this. A number of these investments have actually begun selling physical stores of gold.

A continuation of the correction will not bode well for the mining companies – especially the junior miners. One major argument in support of the price of gold reversing and heading north again is the actual mining cost. Many experts right now determine the cost to mine an ounce of gold is right around $1,100 to $1,200. So as the price falls below these levels, we may see miners closing up shop.

Then again, it costs additional money to close mines, and the argument that a commodity cannot trade for below its actual cost is simply wrong – another point made by Rogers. It might be an argument for why the price will eventually go up, but in the short term, prices can remain below cost for some time.

At this point, it is becoming more difficult to see bright spots in the gold market – at least in the short term. ETFs are likely to perform poorly as long as the price of the underlying metal continues its correction. Direct investments in gold miners would not be recommended either.

Companies that supply gold miners might not be hit quite as hard, especially those which are more diversified and work with other commodities and industries as well. However, it would be difficult to make specific recommendations at this point, especially since it might be a case of just picking a category that will be less bad in the short term.

When to Buy Back In

For investors who subscribe to the viewpoint of Jim Rogers and feel the bull market in gold is not yet over, the key question is when to jump back in.

This might be dependent on an investor's existing situation. For example, someone who continues to hold an existing position in gold – like Mr. Rogers himself, since he has said that he is not selling – might consider buying more to lower the average cost.

Buying on the dips in the gold price correction could be a good strategy, especially if you would like to commit to lowering the average cost of an existing gold position. Of course, this will also depend on the comfort level of the investor.

One of the best ways to do this may be to focus on sentiment indicators. As more and more noise is being made about how terribly gold is doing and why it will continue to decline, those times will likely be the best opportunities to jump in again.

Predicting the bare bottom of any market is extremely difficult, if not impossible. Once again, it can be helpful to watch sentiment indicators and just follow what people are saying about gold. As more and more people and experts begin to come out saying gold is dead and that the metal will not return to her former luster, then the bottom is likely right around the corner...and it is a great time to get back into the market.

What if the Correction is Over?

Of course, the other side to this is that the correction is indeed over. In this case, the recent days of price increases will be followed by more.

In order for this uptick to have any legs, however, it would likely need to see an increase in gold demand. Foreign demand, especially in India and among several other large buyers, actually declined last year. So in order for the correction to be truly over, a reversal of this demand curve would be needed.

If the correction is over, the best place to start re-investing might be in some of the more beaten down ETFs. The Spiders Gold Trust (NYSE: GLD), iShares Gold Trust (NYSE: IAU), and ProShares Ultra Gold (NYSE: UGL) would be some of the better ones to consider. Yes, they have all experienced declines so far this year of between 25 and 46 percent, so this should make them much more responsive to an upswing in the price of the underlying metal.

 

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