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Thread: Gold is Just Getting Started

  1. Default Gold is Just Getting Started

    One of my best calls of the year was to plead with readers to avoid gold like the plague, periodically dipping in on the short side only. The barbarous relic has been in a bear market since it peaked at $1,922 an ounce at the end of August last year. Gold shares have fared much worse, with lead stock Barrack Gold ABX dropping 36 since then and the gold miners ETF GDX suffering a heart rending 43 haircut.

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    It has rallied 170 since the last try a few weeks ago. (GDX) has performed even better, popping 20. For the last month, the entire precious metals space has traded like it was a call option on global quantitative easing (see yesterday piece).

    Dramatically worsening economic data is increasing the likelihood of further monetary easing generating a nice bid for gold.

    Now the calendar is about to ride to the rescue as a close ally. It turns out that in recent years, there has been a major seasonal element to the gold trade, almost as good as the November/May cycle that drives the stock market. Gold typically sees a summer low. Then traders start anticipating the September Indian wedding season when the purchase of gifts and dowries become a big price driver. That explains why India, with a population of 1.2 billion, is the worlds largest gold buyer.

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    Next comes the Christmas jewelry buying season in western countries. That is followed by the gift giving and debt repayments during the Chinese Lunar New Year, during which we see multi-month peaks in the yellow metal. That is exactly what we saw this year. The only weakness in this argument is that a slowing Chinese economy could generate less demand this time.

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    That is not much when you have the entire world bidding for it, governments and individuals alike. Talk about getting a camel through the eye of a needle! We may well see the bull market end only when those two asset classes, government bonds and gold, see outstanding values reach parity, implying a major increase in gold prices from here. That is well above my own personal target of the old inflation adjusted high of $2,300. No wonder buying is spilling out into the other precious metals, silver (SLV), platinum (PPLT), and palladium (PALL).

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    Not that it needs it, but gold is about to get some free advertising at this week is Republican national convention in Tampa, Florida. The right wing of the party has long advocated a return to the gold standard, and a Romney win could take us closer to that goal. I do not think there is a chance in hell of this ever happening, as it would be hugely deflationary. Still a vocal and very public discussion of the topic can not be bad for gold prices.

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