Gold, it seems, just can’t get a good review anywhere these days.
“Gold Declines in Worst Run Since 2001”, headlines Bloomberg. “Gold Warnings Surge as Banks Jump Off Bandwagon”, proclaims CNBC.
Should you give up on gold too? Let’s look at some of the reasons why so many are selling right now and see if their concerns are valid.
“Gold futures fell … as banks in Cyprus reopened, easing concern that Europe’s debt crisis will worsen and curbing demand for haven assets,” Bloomberg reports.
That Cyprus’ banks reopened is not by any means a sign that Europe’s debt crisis is easing. Cypriot banks reopened because “€5 billion worth of cash [was] delivered to Cyprus banks,” reports Voice of Russia Radio.
It was the delivery of one very expensive Band-aid. But the wound is still there, and it is still hemorrhaging – not just in Cyprus, but also in Italy, Spain, Portugal, Ireland, and Greece. And let’s not leave France out of this motley crew of Europe’s financially wounded.
Even if the crisis in Cyprus has abated – which it has not – the Cyprus crisis is not what has been pushing gold higher these past 12 years. If a city block of 10 houses is on fire, putting out the very last house does not solve the problem. You still have the first 9 houses burning to the ground behind you. Financial crises in Europe and around the globe are still there, and they are still burning.
Gold Selloff
Apart from Cyprus banks reopening, a fair bit of good news that came out of the U.S. on Thursday was taken as further reason to sell gold.
“Gold slipped after U.S. GDP data showed the economy expanded at an annual rate of 0.4 percent for the fourth quarter, more than the government had previously estimated,” reported Reuters. “Initial jobless claims rose last week but not enough to suggest the labor market recovery was losing steam. Strong U.S. employment and housing market reports in the first quarter prompted some Federal Reserve officials to suggest the U.S. central bank should halt its stimulus program earlier than expected, weighing on demand for gold as an inflation hedge.”
It’s the same broken record, with the needle hopping over the same mangled grove again and again. Every time we get strong economic reports out of the U.S., someone quotes Federal Reserve “officials” – who all too often turn out to be people who are NOT on the Federal Open Market Committee that actually makes policy decisions – giving their opinion that the Fed should stop its stimulus, only to have Federal Chairman Bernanke come out and clarify that they will NOT stop stimulus because unemployment is still way too high. And did anybody catch that little part in there which says that “initial jobless claims rose”?
Even so, some are now convinced that the conditions that pushed people into gold in the past are simply not there anymore. CNBC relates that Japan’s Nomura Bank believes the “economic recovery, rising interest rates and still benign Western inflation (for now) will likely leave some investors rethinking” their gold investments.
What the bank fails to point out is that interest rates are not rising and will not be for quite some time, as the Federal Reserve has indicated. It also fails to note that inflation has already begun appearing in fuel and food prices, with housing prices also on the rise.
As for the economic recovery damaging gold’s prospects, the state of the economy was not one of the conditions that had pushed gold higher all this time. Remember the stock market’s bull-run from the spring of 2003 to an all-time high in the fall of 2007? Gold rose too, from the mid $200’s to almost $900 over that same period. And again from the spring of 2009 to the fall of 2011, the stock market’s and gold’s bull-runs ran together, in tandem.
It is not necessarily a worsening economy that propels gold higher in every case. Nor does an improving economy necessarily weaken it. It is the future of the U.S. dollar – the future value of money – which determines what gold does.
Gold is being traded mostly as a currency – an alternative currency. And as long as conditions remain negative for the dollar, they will remain positive for gold. Ultra low interest rates and an increasing money supply erode the value of money, which strengthens gold.
Even though the dollar may rally from time to time due to some short term outlook improvement, the fundamentals driving the dollar lower are still active and in play, which keeps the upward force on gold very much in play too.
Even pessimistic Nomura Bank announced its “2013 forecast for gold [of] $1,602 per ounce” “and its 2014 forecast [of] $1,750,” as CNBC noted. While these are cuts from its previous forecasts, they are still higher than gold’s price today. And this is supposed to be defending the pessimistic case?
If these are their forecast price averages for 2013 and 2014, the highs for those years will be higher than these average targets. Thus, any dips in the gold price this month or next should prove to be great buying opportunities, even by Nomura’s lowered expectations.
Others concur. Philip Silverman, managing director of Kingsview Management in New York, interviewed by CNBC, “advised investors not to bet against gold, as central bank demand remains strong. The World Gold Council said last month that central banks gold purchases in 2012 were the highest for nearly 50 years, as banks sought to diversify their reserves. ’You don’t fight the stock markets when the Fed is easing, so you wouldn’t want to fight the central banks when they’re buying gold, because they have deep pockets,’ he said.”
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Remember too that fund managers are under pressure to deliver returns – and fast. They see gold moving sideways while stocks keep pushing higher, and it is inevitable they will jump off the slower wagon onto the faster.
Cites Marketwire.com:
“Eugen Weinberg, head of Commodities research at Commerzbank, said to Reuters, ‘Gold as inflation protection should get more demand from investors in the second half of the year. Right now, the market participants are looking for more yield and they’re finding it in other asset classes like equities.’”
Gold Prices in the Rest of 2013
What will happen in the second half of this year that could drive up the price for gold? Weinberg gives us a preview by noting inflation. Over the next few months into H2, therefore, we can expect a continuation of the Fed’s easy-money policy, low interest rates, a weakening U.S. dollar, and Eurozone debt troubles to finally bring inflation up close and personal, ushering gold into its next major upward advance.
So even if in the current economic atmosphere it has stopped raining for now, remember that rain isn’t the only reason you put on your coat. Cold is still a lingering factor, and taking your coat off now would expose you to the elements. Perhaps any price dip in gold would be a great opportunity to add more layers of protection.
Just how low could gold dip this time? In my previous article, Gold’s Death Cross, you’ll find an explanation of the first major support level in the low $1500’s, and the second major support level in the low $1400’s. Even a break to the mid $1300’s would make the current correction off of 2011’s high less than the 30% correction of 2008.
To help investors sort through the myriad of gold plays, including miners and exploration companies, “Five Star Equities releases regular market updates on the Gold Industry,” informs Marketwire, “so investors can stay ahead of the crowd and make the best investment decisions to maximize their returns.”
Two prospective gold stocks to watch are Gold Fields (NYSE:GFI) and Harmony Gold Mining (NYSE:HMY). Both have been beaten down to well below $10 and may provide an excellent percentage play – more than doubling in price simply by returning to their 2011 highs.
“Gold Fields,” presents Marketwire, “is a significant unhedged producer of gold with attributable annualized production of 2.1 million gold equivalent ounces from six operating mines in Australia, Ghana, Peru and South Africa. Gold Fields International has total managed gold-equivalent Mineral Reserves of 64 million ounces and Mineral Resources of 155 million ounces.”
As for the other prospect, “Harmony [Gold Mining], one of the world’s leading gold mining companies,” reviews Marketwire, “has operations in South Africa and Papua New Guinea and produced 1.27 million oz of gold in fiscal year 2012. In South Africa, the company has ten underground operations located on the world-renowned Witwatersrand Basin, one open-pit mine exploiting the Kraaipan Greenstone Belt, and several other surface operations.”
Look back across these past 12 years, and you will see a striking pattern concerning the gold trade… when everyone was buying – that was the time to sell; when everyone was selling – that was the time to buy. Why would it be any different this time?
Joseph Cafariello
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