Ship may be sailing on gold as global markets wobble

Is the gold price finally on the rebound from its double bottom of last year?

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At the end of last year I called a bottom in the gold market, and suggested buying certain gold and silver-related assets. Actually, it was the double bottom in the gold price last summer, and in December that I flagged it in my column.

It is hard to imagine barely four months later that this was thought controversial at the time. The big guns such as UBS and Goldman Sachs said gold was heading to US$1,050 an ounce and thundered on about investing in US stocks instead. As it turns out US shares have not done so well and gold has been up more than 15 per cent so far this year.

To be fair to the technical analysts they seem to have been fooled by a chart that suggested a return to $1,050 was inevitable. And who knows, they could still be proven right. Precious metals sold-off hard in the global financial crisis of 2008, and some kind of a dip in the gold price in a market panic to meet margin calls is still perfectly possible.

However, back in 2008 gold fell from a high along with stocks. This time around gold has already endured a lengthy correction from its $1,923 an ounce high of two-and-a-half years ago. We would appear to be on the rebound from the second bottom made in December. That would make any pullback very short and the upside potential considerable.

Do you wait to buy? Ask those who wanted to buy gold at the start of this year but persuaded themselves that the top gold analysts must be right. They may have missed the boat completely if prices just continue on the up and up from here. The signs of a gold market changing direction are numerous.

Money is flowing back into gold-backed exchange-traded funds after the huge outflows of last year that brought gold prices down by 28 per cent, almost a mirror image of the 30 per cent surge in the S&P 500. Current action in the futures market is all gold positive. The legendary hedge fund manager George Soros has an option on the gold miners ETF that could net him another billion or more.

Gold bears base their case on a further recovery in the US economy this year that will raise interest rates and make holding gold expensive in terms of the interest that precious metals do not pay. Never mind that such a recovery might be inflationary — especially after the excessive global money printing of the past five years — and that gold is many investors’ chosen hedge against inflation, or that the last period of super-high gold prices came during the high inflation and high interest rates of the 1970s.

Still I would question the strength of the US economic recovery, as the S&P 500 index itself seems to be doing so far this year. The US looks increasingly isolated as an engine of global economic expansion. The overstimulated Chinese dragon is choking on its own pollution and struggling with an $8 trillion shadow-banking crisis that looks more and more like a repeat of the 2008 US subprime debacle.

It is clear now why Chinese retail investors have been such voracious buyers of gold during the past year or so. They have been insuring themselves against a debt crisis that is probably only too obvious to those who live so close to it. Shifting from paper money into gold at relatively low prices has been a great opportunity to move out of a shaky economy and into hard assets.

The world economy is suddenly facing so many headwinds. Europe still has its banking system to reform as well as a new geopolitical crisis on its doorstep in Ukraine. Japan’s epic money printing – three times bigger per capita than the Federal Reserve’s quantitative easing programme – is an accident waiting to happen.

It’s a race between China and Japan to see whose economy blows up first, and commodity producers from Australia to Canada and Russia are feeling the recent slump in iron ore and copper prices because of the pronounced slowdown in China that may have barely started.

What would the Fed’s response be if the financial markets now really sell off and we’re back to a 2008-style global financial crisis? The new chairwoman, Janet Yellen, would undoubtedly print more money to stop severe deflation. That’s the only thing the Fed can do. And which major asset class jumped the most and fastest coming out of the 2008 slump?

Gold was beaten only by its precocious sister, silver.

Peter Cooper is the editor of arabianmoney.net

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