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When
does a precious metal known for feeding off investors’ fears need the
opposite of fear to move higher? Answer: Right now!
Austin
Kiddle, an analyst with bullion broker Sharps Pixley, asked the following question in a recent
commentary: “Can fear refuel the investment demand for gold?”
It’s a question many investors are now asking and well worth
addressing.
The
real question behind this question that investors are asking is: “What
will it take to propel gold higher in the near term?” While
there’s no denying gold is a fear hedge in prolonged periods of deep
uncertainty, gold doesn’t always benefit from fear in the short-term.
The current economic environment is a good example of the exception to that
rule. Gold has actually underperformed in the last five months relative to
the U.S. dollar. The fear and uncertainty generated by the euro zone crisis
resulted in a flight to safety to the dollar while gold was largely ignored
by investors.
The
following chart shows the extent of gold’s underperformance by
comparing the progression of the dollar ETF (symbol UUP) with the SPDR Gold
Trust ETF (symbol GLD). This graph clearly shows that investors have favored
cash over the yellow metal during the most intensive part of the euro zone
fear in the March-June period.
 
Since
June, which was a pivotal month in reversing the public’s extreme fear
of a euro zone collapse, gold has been playing a game of catch-up with the
dollar and is nearly even with the greenback on a relative strength basis
(see chart below).
The
lesson here is that gold’s underperformance in the March-June period
was due to investors’ fears, but its subsequent bounce back since June
can be attributed to gradually diminished fears. If this relationship holds,
gold’s short-term outlook will be bolstered by a decrease in risk
aversion among investors, not fear. With the 4-year cycle peaking
into October, gold can ride the cresting optimism over the broad market
uptrend for equities and commodities as well as the latest “quick
fix” in the ongoing euro zone crisis.
So
it is that gold finds itself – temporarily at least – in the
perverse position of requiring a diminution of fear and pessimism among
market participants to bolster its price. Gold, in other words, will benefit
more from good news than bad news in the near term. Investors shouldn’t
expect this imbalance of investor psychology to last very long, however. Gold
will likely return to its historical tendency of feeding off fear once the
election is over and the 4-year cycle has peaked. Until then, we can only
follow the lead of the short-term technical indicators while gold benefits
from the market’s falling risk aversion.
2014:
America’s Date With Destiny
Take a journey into the future with me
as we discover what the future may unfold in the fateful period leading up to
– and following – the 120-year cycle bottom in late 2014.
Picking up where I left off in my
previous work, The Stock Market Cycles,
I expand on the Kress cycle narrative and explain how the 120-year Mega cycle
influences the market, the economy and other aspects of American life and
culture. My latest book, 2014:
America’s Date With Destiny, examines the most vital issues facing
America and the global economy in the 2-3 years ahead.
Clif Droke
2014: America’s Date With Destiny
Take a journey into the future with me as we
discover what the future may unfold in the fateful period leading up to
– and following – the 120-year cycle bottom in late 2014.
Picking up where I left off in my previous work,
The Stock Market Cycles, I expand on the Kress cycle narrative and explain
how the 120-year Mega cycle influences the market, the economy and other
aspects of American life and culture. My latest book, 2014: America’s
Date With Destiny, examines the most vital issues facing America and the
global economy in the 2-3 years ahead.
The new book explains that the credit crisis
of 2008 was merely the prelude in an intensifying global credit storm. If the
basis for my prediction continue true to form – namely the long-term
Kress cycles – the worst part of the crisis lies ahead in the years
2013-2014. The book is now available for sale at:
http://www.clifdroke.com/books/destiny.html
Order today to receive your autographed copy
and a FREE 1-month trial subscription to the Gold & Silver Stock Report
newsletter. Published twice each week, the newsletter uses the method
described in this book for making profitable trades among the actively traded
gold mining shares.
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