Are We Approaching Capitulation in the Gold Market?

Thursday November 13, 2014, 4:25pm PST
By Nick Wells - Exclusive to Gold Investing News

As the gold market continues its bearish ways, analysts and gold watchers are examining the possibility of the market experiencing complete capitulation.

But what does capitulation mean in terms of the gold market and how can it impact investors? Gold Investing News takes a look into the concept to help investors get a better understanding of what they could be up against.
 

Simply put

In a piece published by Sprott Global5, Rick Rule sums up capitulation as investors and issuers completely giving up hope — in other words, liquidating assets tied up in the gold market, including stocks and the commodity itself, and ridding themselves of the heartache and wallet gouging associated with price falls.

The bright side is that such events are quick. "Capitulation in 2000 only lasted for about two weeks. Just like when you're stuck underwater and struggling to come back up, a short amount of time can seem like an eternity," he states.

Rule is currently advising investors to "psychologically" prepare themselves for the possibility of capitulation as that will allow for greater ease if gold market capitulation does occur.

"Abandon your 'hope stocks' — the ones where there is no catalyst, asset, or enough cash to do anything important. Get rid of the stocks you own that have no reason to go up, and get into ones that do," he notes.

Other investors might not be so blunt, but carry the same message.

"The big hubristic 'tell,' will be gold," states Michael Hartnett, an investment strategist with Bank of America Merrill Lynch, in a recent note. "A sudden gap lower in the gold price to below $1,000/oz. should coincide with the final thrust higher in stocks, both indicating capitulation of the 'stubborn bears,' the end of the 'melt-up' and the next opportunity to get tactically bearish. We increasingly fear next year's highs in stocks come early."

Are we there yet?

Opinion remains mixed on this question. As the cliche goes, hindsight is always 20/20 — from the future it's easy to look back and see when capitulation took hold of the market, but it's not so easy to do before it happens.

As mentioned, Rule doesn't believe the market has hit the desperate struggle of capitulation and Hartnett has echoed that statement. David Rosenberg, chief strategist with Gluskin Scheff, has said there is more pain yet to come in the gold market, and also believes capitulation hasn't yet reached the market.

Meanwhile, Mark Dow has written on his website6 that the market appears to be on the verge of the second gold bubble collapsing, with dire consequences for those holding stock in the yellow metal.

The upshot thus seems to be that the gold market is not yet at full-blown capitulation. There's still some fight in investors as they examine gold's long-term play.