WATCHING & WAITING
So the world watches, essentially on standby, waiting to see if the global economy can pull it off or not. And that's where the markets will help provide direction.
The bottom line for gold is uncertainty. It continues to be the driving force because just about anything is possible.
Nothing has really changed since many threw in the towel on gold's 12 year old bull market. Do you really think the financial problems have gone away? Is the debt not a problem anymore, even though it continues to climb to considerable heights?
Do you really think the Fed will end its money creation smoothly?... Will Japan?... Will the ECB? These are the big unknowns and they're unlikely to end well.
SCRAMBLE TO BUY PHYSICAL
With this backdrop, many feel that gold's steep decline was manipulated, and almost assuredly violations occurred. But one thing is certain, the huge demand to buy gold during the drop has been impressive and very telling for the future.
In the days following the April 12 and 15 gold plunged, for example, the Chinese Gold and Silver Exchange nearly ran out of bullion, the U.S. Mint ran out of small Eagle coins, and there was a substantial premium over the paper price for the physical gold that was available. In fact, it took the U.S. Mint one month to resume their coin sales.
Large interests jumped in to buy gold at the cheaper price. Demand soared in Russia and India, while Asian central banks' demand hit a record. In India, gold purchases were so strong, the Finance Minister complained that India's hunger for gold was widening the trade deficit.
As Eric Sprott of Sprott Asset Management explains. the gold market hasn't changed its supply fundamentals in 12 years. But since 2000, we've had much more demand... This has come from central bankers becoming net buyers, to a fourfold growth in annual gold coin sales in the U.S. and Canada, to China's consumption quadrupling, while India's consumption has grown by 30%. In other words, the fundamentals remain bullish.
That's why we continue to recommend accumulating, at least a small position in gold during these seasonally weak Summer months.
Gold is our insurance against financial bubbles and crashes. Many say the deflationary pressures that have taken hold are not a good environment for a rising gold price. This, in part, is true. Gold generally tends to rise during inflationary times. But there's just too much uncertainty in the world today to ignore gold.
THE DOWNSIDE LOOK
Considering June tends to be the worst month for gold, when more gold bottoms have taken place, gold is now likely close to reaching a bottom area.
For now, gold is very weak below $1320 and it's very oversold (see Chart 1). Normally, this would be a bottoming sign, but if the $1200 level is clearly broken, we could see gold hit the $1000 area in a worst case scenario.
The bottom line is... the time of truth will be seen this year. We're most likely looking over a shallow valley, and if gold has any life to it, the upcoming intermediate rise will tell the story.
By Mary Anne & Pamela Aden,
Courtesy of www.adenforecast.com |
