Gold Rush -- Briefing.com
In little less than two weeks, the Gold & Silver index, or XAU, has rallied an eye-opening 21%. With the spot metal breaking above $300 an ounce for the first time in two years, gold bugs have come out of the woodwork and are predicting spot prices of $355 to as much as $1000 an ounce (in the years to come). Are they to be believed? Is this the beginning of the long-awaited bull run in gold? Or is it just another news-related bubble that quickly gets pricked by central bank selling and a strong dollar?
In order to answer these questions a little history is in order. Let's begin by paraphrasing Groucho Marx: 'ten years ago if you started off with a nickel in your pocket, and added another nickel for every time gold bugs correctly forecasted the next big rally in gold, you would have a nickel in your pocket.' Current hype aside, the reality is that gold has risen in only four of the past ten years, and is still about 20% below where it began trading a decade ago. Though last year was one of the good years, it's important to remember that a) the metal was bouncing off a near 20-year low b) the global economy was in recession c) worldwide equity markets were in full retreat and d) the terrorist attacks on the US created a climate of political and economic instability.
Considering that most of the concerns which hung over the financial markets last year exist (to some degree) still today, it's not surprising that gold prices have continued to rise. What has been surprising is the pace of the advance. But that can be attributed in large part to the Enron scandal, and the doubts it has raised about the credibility of corporate finances and of Wall Street.
There have been other factors contributing to the metal's recent rise including: Argentina's financial woes, central bank buying (largely China), a spike in Japanese buying ahead of a change in government guarantees on bank deposits, and a trend toward less producer hedging. With regard to the last issue, two of the largest gold producers -- AngloGold and Newmont Mining (which recently merged with Canada's Franco-Nevada Mining and is about to complete merger with Australia's Normandy Mining) confirmed that they would be sharply reducing or eliminating hedging altogether.
Clearly, there's an impressive array of forces underpinning the current advance in gold prices. Though Briefing.com expects the domestic economy to gain momentum as the year unfolds, there's enough uncertainty regarding the strength of any such recovery to suggest that gold will remain in favor as a hedge against prolonged sluggishness. Meanwhile, the other main forces which had been weighing on gold over the past few years -- central bank selling and the strong dollar -- appear less relevant. The market has adjusted to the more predictable selling by central banks and though the dollar remains strong against most global currencies, virtually all major currencies have lost value relative to gold -- a signal that many investors are losing confidence in the monetary policies of the developed nations.
Given how quickly gold spiked, don't be surprised to see the metal lose some of its glitter over the very short-term... However, as long as support in the $278 area holds on any correction, Briefing.com expects gold to make another run at the 310 area, with penetration setting up an intermediate-term test of the $335-$350 area.
There are numerous ways to play the run in gold from an investment standpoint. Of course, you can buy the metal itself, there are many mutual funds which invest in gold/mining companies, or you can buy one or more gold stocks. If you are considering the latter route, however, note that most gold/metals stocks are trading near the high-end of their historic valuation ranges. That may not matter much as long as the climate surrounding the base metal is so bullish, but if we learned any lessons from the tech mania it is that in the end value always matters. |
