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What Happened to Gold's "Disaster-Driven" Bull Market?

Gold prices have tumbled to their lowest level since February. Here's why.

by Nico Isaac
Updated: December 19, 2016

On December 16, gold prices plunged to their lowest level in 10-and-a-half months. For many gold bugs, the precious metals' 2016 slide is a shock on par with the "red-wedding" massacre on Game of Thrones.

In other words, gold bugs didn't see it coming!

And why should they have? The moment Britain voted to leave the European Union on June 23, the mainstream precious metal pundits held a unanimous vote: namely, the biggest political blow to Europe since World War II was the straw that broke the gold bear's back.

Here, these news items from the time recapture the renewed gold fever:

"Gold has likely entered the early stages of the next bull run. This trend should now deepen, attracting more participants and encouraging those who have been hesitant to get more involved." (CNBC)

"$1400 is very much in the cards this year." (CNBC)

"Gold headed for $1500 and this time it really is different" (Seeking Alpha)

"Gold is in a major bull market and may surge to more than $1500 an ounce." (Bloomberg)

"Gold may stand at the start of a major bull market should the UK's Brexit vote prove to be a forerunner of greater political and finanical instability around the world." (Bloomberg)

As for being a "forerunner of greater political and financial instability around the world" -- here's a short list of destabilizing events which followed in Brexit's wake:

Puerto Rico declared bankruptcy; the World Health Organization declared Zika virus a global health emergency; Black Lives Matter movement gathered momentum across the U.S.; deadly attempted military coup in Turkey; humanitarian crisis in Aleppo; refugees crisis in Europe; Brazil impeached and removed President; Hurricane Mathew devastated Haiti, Caribbean and part of the U.S.; Dakota Pipeline protests; Russian email hacking scandal; Indian government banning 100 and 500 rupee notes; continued historic low interest rates -- and, oh yeah, the biggest presidential election shock in U.S. history.

Political and financial instability -- check.

Need for a safe haven amidst the chaos -- check.

And yet, instead of soaring to $1400, $1500 and beyond, gold prices turned down from their 2-year high in early July and plunged to the 10.5 month low we saw on December 16.

At the onset of gold's 2016 reversal was our July 2016 Elliott Wave Financial Forecast to explain why the metal was not, in fact, at the cusp of a new bull market -- but rather, at the end of a bear market rally:

"Incredibly, yet completely in line with normal behavior for early-stage, bear-market rallies, the trend-followers are betting on a continuation of gold's advance to a degree that is even greater than when prices were peaking at $1921 in September 2011. This extreme, emerging so quickly after the December low, confirms that gold's rally is a countertrend advance and not the start of a new bull market. An old market saw is that there is no fever like gold fever, and the mercury has now risen to the top of the thermometer.

"[The rally] has now satisfied its minimum expectations...the Commitment of Traders data suggests that the quick and easy portion of gold's upward correction has likely passed."

Two days after touching its July 6 high, our July 8 Short Term Update confirmed the onset of a new downtrend:

"[Gold] pushed to $1376.01 Wednesday night and has closed lower for the past two days. The Daily Sentiment Index rose to 83% Wednesday night in conjunction with the high.

"The Commitment of Traders data is unequivocally bearish, as we discussed in our Elliott Wave Financial Forecast... The rally that started last December 2015 ($1046.20) has traced out three waves. A close below $1300 would suggest strongly that gold's rally had exhausted, raising the odds that [the bear market rally] is complete."

Now, "With Gold Prices Stuck in 'Purgatory,' Hedge Funds Pull Out," reports Bloomberg. Is that a bearish sign?

Look at it this way. Back in July, a bullish extreme in sentiment confirmed our Elliott wave forecast to expect gold prices to fall. We'll see if today's rejection of gold by the market players will coincide with a bullish turn in prices; sentiment extremes often mark price reversals.

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