Gold is now itching to break through its 6-week high. Q4 is usually the strongest quarter for gold, so you might want to get ready for it. Remember just six months ago when everyone was talking about the bubble in gold around $1100/oz?
This time last year, you laughed when gold was $950/oz.
But over a period of 12 months gold climbed steadily, up 29%, to the $1230 levels we see today. What will another year in gold bring? Quite simply, all the factors making gold bullish last year are basically still there this year. If anything, insofar as the economic environment is more uncertain now (deflation? inflation? double dip? more QE? more regulation?), factors are all lined up more strongly in gold’s favor.
Slower Global Q2 GDP Growth = Higher Gold
Thanks to next-to-no Q2 GDP growth in Japan (0.1%), with likely downward trends in worldwide GDP as well, gold has already inched higher over the past week. Canada is a resource economy, and Canada’s GDP growth is expected to drop in half for Q2. And with the near-term stimulus having run out in the U.S., growth projections all around have been downgraded for the upcoming quarter.
Dismal Housing and Unemployment in U.S. = Higher Gold
Last Thursday’s U.S. data was really bad – way worse than anyone expected. Housing sales plummeted 27%, which was considerably more than the lowest estimate. This took a chunk out of the markets, some of which was recovered on Friday. The U.S. also released data showing that claims for unemployment benefits reached new 9-month highs, and this sent the price of gold back up to near-term highs at $1237/oz.
Second (or is it 3rd?) Round of QE = Gold FTW
Bernanke’s latest announcement went in a number of directions, but what most analysts have caught onto is the fact that there is, effectively, going to be another round of quantitative easing. The Fed will buy up more government debt with the money it receives back from maturing mortgage-backed securities. It’s not an official expansion of the balance sheets, but it’s moving the money from one asset class into another, qualitatively different asset class with different consequences.
This is the sort of thing that could happen over and over again, especially if interest rates should ever need to rise slightly – the Fed will help roll over short-term government debt. None of it is good for the value of the US dollar, if anyone believes that its value matters anymore.
September-October Stock Market Risks = Good for Gold
Volume really picks up in September, especially after Labor Day, as traders and politicians come back from vacation and begin to get back to serious work (the same applies to students and academics, a large segment of the buying population that should not be ignored). And don’t forget – Fannie and Freddie were taken over in early September 2008, and the Lehman crash happened in mid-September 2008.
September has also been designated the most stressful month of the year. This was based on a study that I read about several years ago. I’m sure it’s locatable somewhere online. Also – I’m not sure if this is significant enough to have its own category or not – the Hindenburg Omen has been confirmed not once, not twice, but three times in the past few weeks of August.
Seasonal Strength in Gold = Great for Gold
It’s jewelry season again – don’t underestimate the pressure this can put on gold prices. Indian festivals begin in late August. Additionally, gold rises on the back of uncertainty in stock market activity in September and October, as mentioned above. After that, the run-up to the Christmas holiday season takes over. It might also be a hoarding instinct – gathering the “real stuff” before Winter kicks in (for the Northern hemisphere, of course). During the last months of the year, gold has tended to rise an average of 15% over the past ten years.
Bad Bubble in US Treasuries = Pressure on Gold
With growth in equities fewer and far between, and scant yields for the picking, I’d bet on less profit-taking in gold until significant new highs are made. And as Gonzalo Lira has recently argued, any weakness in the Treasuries market is going to send investors flying into gold as fast as they can.
So that gold slowdown we saw mid-way through the year was no bubble popping. That was profit-taking in an uncertain growth market – and with more money still on the sidelines, there is more money seeking safety. Once people perceive that Treasuries may not be as safe as they claim (which is not to call them unsafe, but merely to point out they can’t exactly be called “triple A”), gold becomes the natural second choice.
Investing in Gold Stocks
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