We will begin by taking a look at some of the factors that usually drive investors into the arms of ‘safe haven’ gold and other precious metals.
We are all aware that the world is in a chaotic state at the moment with a number of friction points that could spark and get of hand at any time. The debt ceiling has been raised in the United States paving the way for more government spending. Bond buying programs remain in place and currency creation by a number of governments continues unabated as each nation attempts to boost exports by debasing their own currency. The production of gold from mining activities is slowing. The demand, especially from China appears to be in overdrive. On a seasonality basis the fall is usually a time when gold does very well, but that is not happening this year, at least not just yet.
The list of positive factors that support higher gold prices goes on and on, however, as the chart below shows, gold is now trading at around $1300/oz which is long way down from the heady days of $1900/oz, achieved in 2011.
The Gold Chart
The gold chart shows that over the last 6 months gold has tried to rally and failed. The best it could do was a large jump on the news that ‘tapering’ had been deferred and that lasted for just two days before all those gains were lost. We would also draw your attention to the formation of a pattern of lower highs and lower lows which suggests weakness and further losses in value.
Gold also has an inverse relationship with the US Dollar so it’s important that we monitor the dollars progress and performance.
The US Dollar Chart
The dollar has been sold off recently as evidenced by the US Dollar Index which depicts the dollar falling from ‘85’ to ‘79’ over the last 4 months. If the dollar can hold at this level then there is a possibility of a rally, which would in turn put a lid on gold’s progress. A lot depends on the Feds assessment of the inflation and the employment figures, the latest of which were released earlier this week. The consensus was for around 180,000 new jobs so the figure of 148,000 is low but sufficient for the Fed to assume that they have in place the correct course of action.
We doubt that we will see tapering this year and we expect the current level of QE to be maintained. This should have a negative impact on the dollar, although this level of stimulus is becoming the ‘norm’ and so the Law of Diminishing returns comes into play. Should QE be increased then the dollar would weaken and gold would be the beneficiary.
The tensions that exist in the world today are a known quantity and are therefore included in the price of gold.
The creation of more and more money has become the rule rather than the exception and so gold largely ignores it.
China is now the second largest economy in the world so it is reasonable to expect that they should be acquiring more hard assets such as gold. To fascilitate China’s purchases of gold someone else must be selling and so the transfer of wealth from the west to east continues. A change in ownership does not necessarily equate to a new bull market in precious metals.
The bear trend within the gold bull market is still in place so why not wait until you are sure that this phase has exhausted itself and a new bull phase has commenced. Sure you will miss the beginning of the move but you will have more certainty of generating a decent profit.
Should gold manage to form a new near term high; say a close above $1400/oz, then we might get a decent rally, but don’t hold your breath, it could be months away.
The cost to produce gold is now closing in on the gold price which means that it is doubly important to select good quality gold producers, as they should survive any downturn in prices and live to fight another day, even pay a decent dividend one day, now there’s a novel idea.
In a nutshell it’s a time for patience, a time to do the due diligence that is necessary before embarking on the acquisition trail.
In September 2011 the Gold Bugs index, the HUI stood at 630 as gold prices peaked, since then both have trended lower with the HUI losing about 65% of its value. The bottom has been called a number of times and after such a dramatic decline its difficult not to think that we are there now. However, as we all know the timing of any investment is crucial to its success and that is exactly what we are trying to do here, trying to pick advantageous entry and exit points. If you would like to know which stocks we are buying and selling please join us at ‘Stock Trader’ our premium investment service.
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