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Gold has been one of the most volatile
markets.
But gold is bullish and the major trend
is up, despite the volatility. In fact, gold has held firmly above its $1600
major support, which has become increasingly important.
Whenever gold sells off, big buyers come
in to take advantage of lower prices. This is a pattern we’ve seen
consistently and we expect it’ll continue.
NEGATIVE IMPACTS
Meanwhile, there are several reasons for
gold’s volatility....
First, gold has also become addicted to
the Fed’s actions. It’s been rising like the other markets when
the Fed suggests easy money is coming. And gold’s been falling sharply
when QE hopes dim.
This influence on gold tends to occur
during downward corrections or consolidation periods, like we’ve seen
since September. Gold often gets pushed around during weakness.
Gold’s strength dominates,
however, during bull market rises. Nothing gets in its way and safe haven
buying has been one valid reason for this.
Also important has been the slowing
Chinese economy. Since China has become the engine of global growth, its
slowdown has hurt all of the commodities and metals in general, because
slowdowns mean less demand.
The higher dollar has also had a
negative impact, but now sentiment is changing somewhat.
GOLD’S BULLISH FACTORS
As Q2 gets underway, stocks declined.
With tensions in the Eurozone resurfacing, uncertainty is coming back. This
is helping to build a good foundation.
In Europe, for instance, Spain is
becoming a real worry and it’s much larger than Greece. Concerns the
Eurozone may be unable to handle the brewing potential problem as easily as
it did in Greece is weighing on stocks and pushing up gold.
At the same time, demand is also an
ongoing factor that is keeping a solid floor under the gold price.
Central banks have been steady buyers as
they grow weary of the Fed’s monetary actions and build their gold
reserves, and China remains at the forefront. Not only is China the
world’s biggest gold producer, it’s also the world’s
biggest gold buyer.
Like the central banks, big successful
investors have also been buying all along. This too is a sign that gold is
likely near a bottom.
Plus, don’t forget that inflation
is brewing due to the Fed’s policies while real interest rates are
below zero. Both are very bullish signs for gold.
These are the main reasons why we
believe gold’s bull market will continue on its upward path.
GOLD’S CALM FOR 7 MONTHS CREATES
MORE BEARS
After a steady consistent rise in gold
for 11 years, we can understand why some feel the bull market is over.
But don’t be fooled, a trend is in
motion until it’s over. This is a simple yet powerful phrase, and it
tells us to stay invested until the move is over.
It’s amazing to think that gold
has risen 660% since 2001, or even better, it rose 170% from the 2008 low to
last September’s record high near $1900, without much of a decline
along the way.
Yet the decline from its September peak has so far been less than 20%. And
even if gold were to decline below $1600 to last December’s low near
$1540, it would still be a mild decline compared to the rise.
This is where you want to keep your
focus during these sluggish times because they could last a bit longer.
GOLD: Best asset class
The big picture on Chart 1
provides an example. It shows gold compared to stocks, bonds and a strong
currency since 1979.
Note the clear change in the mega trend
starting with the new century. Gold has steadily outperformed the stock
market, bonds and the Swiss franc since early 2000. And this too will likely
continue.
WHAT HAPPENED TO GOLD SHARES?
Many scratch their heads and wonder
about the gold shares. Why are they so weak?
Gold shares lost their super strength
following the 2008 plunge.
Chart 2 shows gold
and gold shares indexed to 100 starting in 1968. Here you can see
gold’s ongoing strength compared to gold shares over the last 40 years.
But looking at the indicator, B, note
the clear times when gold was super cheap versus gold shares. This proved to
be true in 2010 and gold has outperformed gold shares since then.
The indicator, however, is now
approaching a gold high area, which means gold is getting too high versus
gold shares, and their time is coming right up. In other words, gold shares
are near a bottom.
Overall, we don’t think gold
shares are leading the way for gold. On the contrary, it looks like
it’s just a matter of time until gold shares catch up to the gold
price.
Mary Anne and
Pamela Aden
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