The bullish fundamentals for gold are many.
#1 Gold is a key hedge for inflation. The fundamentals for inflation remain strong with the central banks across the globe engaged in a money printing contest. The U.S. Federal Reserve has the most powerful printing press, so I expect the fundamentals for gold to remain strong in the U.S. as long as the U.S. government runs a deficit.
In my article, "SPY Soars And Gold Falls As U.S. Borrows 24.6 Cents Of Every Dollar Spent In Fiscal 2013", I show the deficits fell in the last two months, with January showing a surplus. I suspect the recent weakness in gold is partially due to lower government deficits. Most predict deficit spending will resume, and the Federal Reserve will continue its program of QE to buy the debt to keep rates low. This is bullish for gold.
#2 Gold is a popular way to store wealth in developing countries that do not trust banks for their savings. A big factor driving stocks higher is the poor in emerging markets are getting jobs and moving from subsistence farming to actually making enough to save or spend on luxury items.
#3 Gold is a popular way to display wealth, with gold jewelry and teeth favorites in many parts of the world.
The bearish case for gold rests on a complete failure of central banks to create inflation by devaluing their currency. Many gold bears expect deflation, not inflation, often followed by civil unrest.
Today, the price of gold has broken below $1600, and currently trades at $1579. The exchange traded fund for gold, the SPDR Gold Trust (NYSEARCA:GLD), is at $152, and is fast approaching a major "resistance-turned-support" line. The last time GLD tested a "resistance-turned-support" line was in April 2009, shown as the dashed red line on my chart below.
Note how a bounce off the dashed red resistance-turned-support line in April 2009 in the $800s was very bullish. Four years later, Gold is making a similar test of resistance turned support shown by a dashed green line in the above chart.
The next support level is way below the current price. If you do buy GLD at $150, I'd consider a tight stop loss because the next support level for gold is at $1300, which would be about $130 for GLD!
I am giving serious consideration to a trade for my own portfolio at about $150 with a 2% stop loss at $147.
Why I Might Be Right
Back in August 2011, on my own website here, to suggest taking profits in Gold was right at major resistance. Gold had touched the high 1800s, the dashed red line on my chart. Every time that happened in the prior decade, gold prices corrected significantly.
August 25, 2011. This graph shows the price of gold from January 1, 2000 through August 24, 2011. The dashed green lines show major support levels. The dashed red line shows the major resistance level line that has been tested three times in the past decade. I also show GLD, the exchange traded fund for gold.
Three months later, gold fell to the $1600s, and GLD was in the $160s. I sort of celebrated my warning in a short article here, where I posted this next graph.
I didn't buy Gold for my portfolio at that time, as I still liked equities more. I wrote in this February 2011 Seeking Alpha article, "How to Play Expected Inflation from the TIPS Spread" that I was long SPY as one way to benefit from expected inflation. "I also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P 500, for both inflation protection and income."
Now that SPY adjusted for dividends is just off a record high and Gold is at a significant resistance level, it might be a good time to buy some GLD with a tight stop. I have not bought any for my own portfolios as an investment because I am not convinced this resistance level will hold AND that Gold (or its ETF GLD) will outperform the stocks I hold going forward.
Now that I have had plenty of "practice" trying to pick good times to buy and sell gold with good success, it might be time for a change. The stocks I owned and recommended here and in my newsletter have done much better than gold the past two years, so I am happy with my choice. Now with my "Newsletter Explore" and personal portfolios at all-time highs, I have taken profits in my stocks. Now it might be time to take a first shot at buying some gold via GLD.
What do you think?
Disclosure: I am long SPY, and I may initiate a position in GLD in the next 72 hours using some of the cash from taking profits in SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.