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What accounts
for gold's strong performance since the initial rebound in July? That's the
question that many analysts are (belatedly) trying to answer. The first and
most obvious answer is stimulus; specifically the stimulus provided by the
world's leading central bank in the U.S. The Federal Reserve's latest
bond-buying scheme known as QE3 is to date the biggest stimulus aid that has
had an impact in boosting the gold price.
As we all
know, gold loves inflation and any increase in monetary liquidity in the
global financial system will be reflected in an increasing gold price sooner
or later. Analysts have noted that the gold price has recently increased in,
Euro, Swiss Franc and Indian Rupee terms, which indicates monetary stimulus
particularly benefits gold. As bullion broker Sharps Pixley
observed, "This is not just a weak dollar story."
On a more
technical level, the explanation you've heard me repeat since earlier this
summer is that gold was oversold on a multi-year basis. According to the
10-month price oscillator for gold, gold reached its most sold out reading in
at least 10 years a few months ago and this preceded the run-up in the gold
price that has occurred since July. I've incorporated the 10-month oscillator
in this report since at least 2003 and it has proven its merit as an
intermediate-term gold price indicator time after time. Although it isn't
used as a short-term turning point indicator, it has an unparalleled record
for accuracy when it comes to predicting critical junctures in the gold price
performance on a multi-month basis.
 
Another
reason that some experts attribute to gold's strong performance lately
involves China's economic outlook. According to Bloomberg, the August Chinese
year-on-year industrial profit net income fell for the fifth month by 6.2
percent. As Sharps Pixley pointed out, "With
the prospect of not hitting its 2012 growth target, the Chinese government
may announce further stimulus and rate-cutting measures and IPO reforms to
boost growth and rescue the stock market." The firm observed that such
speculation has boosted gold prices in recent days.
It should
also be pointed out that China, as a leading consumer of gold, would be
likely to increase its gold consumption if its economy is revived through the
monetary stimulus route. It's possible that gold's rally is, at least in
part, an anticipation of this eventuality.
Despite all
of this, gold's latest outperformance isn't merely a response to central bank
stimulus. One of gold's primary roles in times of core economic deflation,
which we've been experiencing in recent years, is that of a financial safe
haven. Simply put, investors flock to gold in times of monetary chaos and
economic uncertainty which gives gold a "fear premium." Gold feeds
off fear in deflationary times since the "hot money" which flows
from investors leaving the dollar helps to create sustained forward momentum
on a longer-term basis for the yellow metal.
The latest
round of global fear has been sparked by Spain and its refusal (to date) of
the terms for a sovereign bailout. The bailout that Europe seeks to impose
upon Spain is intended to help solve the country's debt crisis. As it turns
out, Spain's refusal to seek the bailout is holding up the stimulus for the
rest of the troubled euro zone. European Central Bank President Mario Draghi stated recently that the ECB won't start intervening
in bond markets until Spain requests a bailout and agrees to the conditions
imposed by the central bank.
Moreover, an
ECB news release stated that request for help is only one "necessary
condition" for receiving a bailout, implying that other conditions might
also need to be met before the ECB is ready to intervene. What this means is
that the global financial system isn't fully benefiting from the promised
stimulus yet. That's one reason why investors are still panicky about Europe
and are still piling into gold in spite of the lack of a coordinated global
stimulus.
The opposing
forces of illiquidity, and the fear it's breeding in Europe, and the
liquidity provided by QE3 has conspired to create the "perfect
storm" for a gold price rally. Thus we find that gold is being driven by
two contradictory forces, namely fear and greed. Regardless of which of these
two motive forces ultimately prevails, gold should continue to benefit at
least until the long-wave deflationary cycle bottoms in late 2014.
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
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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:
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Order today to receive your autographed copy
and a FREE 1-month trial subscription to the Gold & Silver Stock Report
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gold mining shares.
Clif Droke
is the editor of the three times weekly Momentum Strategies Report
newsletter, published since 1997, which covers U.S. equity markets and
various stock sectors, natural resources, money supply and bank credit
trends, the dollar and the U.S. economy. The forecasts are made using a
unique proprietary blend of analytical methods involving cycles, internal
momentum and moving average systems, as well as investor sentiment. He is
also the author of numerous books, including most recently “2014:
America’s Date With Destiny.” For
more information visit www.clifdroke.com
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