Many investors are scratching their heads right about now, wondering what has happened to the gold rally. Is it a short term glitch or a beginning of something more painful?
Gold has enjoyed a great rally since the beginning of the 2000s and hit a new all-time high in the first quarter of 2013. Since then it is down about 30%. Gold miners are down more than 50%. What should the investor do now? Well, one should probably look at two time frames, short and long term.
Short term it is very likely that gold will rebound. The rebound is likely to be in the range of 10-25%. Here are some of the reasons why that is likely.
– Given the fast and huge fall of gold prices in a very short period, one may conclude that it was emotion-driven and probably overshot on the downside. It is not a guarantee, but chances are there are some big gold investors such as foreign governments, fund managers and hedge funds, who are probably salivating for gold at these prices right now.
– After the Bernanke speech spooked the gold market, Fed members have been coming out nonstop trying to clarify the situation. They are suggesting that the market misread the timing of the taper and misunderstood monetary tightening with the slowdown of bond purchases.
– The US dollar has been going up. Commodities tend to come down when this is the case. If the economy is truly on a firmer footing, the USD will likely fall as risk fades. That should provide a positive catalyst to gold and other commodities.
– Gold was always considered (rightly or wrongly) an inflation hedge. There is no inflation in government data. That is partly due to stable gas/oil markets. A minor disruption, such as geopolitical conflict or a hurricane, and oil will spike up. Inflation will go higher and that is good for gold prices.
– House prices have been going up and the latest data showed a price increase of 12%. That is likely to bump inflation numbers and that is a positive catalyst for gold.
– The ‘herd’ is saying: ”Sell, sell, sell!” If you watched CNBC over the past week everyone all of a sudden thinks gold is dead money and is moving away. Though it may be the case at some point, nothing has changed fundamentally and Bernanke’s forecast might not come true. Just look at the latest GDP report which showed a still weak economy.
So given these six reasons, there is a good chance that short term gold prices will go back up. One of the ways to participate in that is through GLD and GDX (miners ETF – more volatile, but if it goes up it will likely make more money faster).
In the long run, the price of gold will depend on when the Fed actually begins to tighten monetary policy, whether inflation will spike up and whether gold mining companies will curtail production. These are events that are hard to predict with great precision. Hence, investors should watch it carefully.
As always, speak with your financial advisor before making any investment decisions.