The past two quarters has been a tough time for gold (GLD) (IAU) investors; the yellow metal has lost more than 10% over the past two quarters while gold miners (GDX) have lost more than 30% over this period. To make matters worse, US equities (SPY) have performed remarkably well over the same period leaving even the most arduous gold bugs tempted to liquidate their gold holdings in favor of equities. Although, I am firmly bullish on gold's long-term prospects, the near-term variation in is harder to predict. However, I would advise investors who have held through the pain of the past six months that this is not the time to sell. Here are some of the catalysts that, in my opinion, will support gold prices this quarter.
Spring Slump in the US
A major factor that is used to explain gold's decline over the past few months is the perception that the US economy is on the mend, raising fears that the Fed might start to taper off its bond buying programs. Those who were favoring this view were given a reality check in the March jobs report which showed that the US economy added just 88,000 jobs last month which was well below analysts' expectations. Comments from various FOMC members show that the Fed is not buying this illusion of a strong economic recovery. In remarks made at the Economic Club of New York two weeks before the jobs report came out, President of the New York Fed and Vice Chairman of the FOMC noted: "The recent improvement in payroll employment growth, which gets much of the attention, is out-sized relative to the growth rate of economic activity that supports it. We have seen this movie before. When this happened in 2011 and 2012, employment growth subsequently slowed." He argued that although the unemployment is going down, other indicators of labor market activity such as employment-to-population ratio and job-finding rates are not supportive of a sustainable recovery. Eric Rosengren, President of the Boston Fed and a voting FOMC member agrees. "Continued accommodative policy, such as continuing our asset purchase program through this year, is an appropriate response to labor-market scarring," he said in a speech on April 5 before the release of the jobs report. Charles Evans of the Chicago Fed is also very dovish. "Exit is so far in the future, it's not something I want to talk about," he said about fears of the Fed thinking about ending the QE. These comments show that the Fed fears that another summer slump is coming, and it will keep its printing machines running 24/7 to avoid it which should also be bullish for gold.
European politicians and bankers continue in their efforts to convince the investors that everything is fine in the eurozone and the crisis is over. However, every few months, a new crisis erupts to warn investors about the reality. For now, the Cyprus issue has been explained away as a "special" case because Cyprus is just a tiny part of the eurozone economy. However, the Cypriot crisis shows that significant risks remain about any unpredictable event that could bring back a full scale investor panic. Investors should not forget that almost a month has passed since the Italian elections and a government has still not been formed. The Italian economy remains in terrible shape and concerns remain that Italy could fall behind on its "structural reform" program, which would prompt Brussels to force even more austerity on the Italians. With elections potentially looming, such a move might give even more popularity to the already popular anti-austerity Five Star Movement party that has been calling for a referendum on the Euro (FXE). Along with Italy, the political temperature in Germany would remain high as well in the coming quarter in the run-up to the German federal election due to be held in September. While the rhetoric in Italy remains anti-austerity, the Germans are getting increasingly frustrated at having to bail out eurozone periphery countries, so the German politicians will also have to play for the increasingly anti-euro sentiment among the Germans. Evidence of this anti-Euro sentiment in Germany is the increasing popularity of the recently formed Alternative für Deutschland (AfD) party lead by the country's economists and academics. The growing resentment against using German taxpayer money for periphery bailouts would force Merkel to take an even tougher stance against the periphery countries if they are seen struggling to enforce austerity measures to appeal to the German political sentiment. So to sum up, various risks from the eurozone would generate demand for safe haven investments like gold and any high risk scenario playing out could push gold significantly higher.
Currency War in Asia
Away from US and Europe, the recent developments in Japan should also support gold prices in the coming quarter by triggering a currency war in Asia. The Japanese Yen (FXY) has depreciated by more than 25% against the US dollar (UUP) in the past two quarters making Japanese exports more competitive at the expense of Chinese and Korean products. "Much more depreciation of the yen has to take place in order to get even close to 2 percent [inflation]… I'm not sure that other G-7 countries are willing to permit that," said billionaire investor Bill Gross on BoJ's move to embark on unprecedented monetary easing.
So far, the Chinese government appears to have a neutral view on Bank of Japan's (BoJ) recent moves, but privately, many of China's top economists have lambasted the BoJ's move to expand its balance sheet as "blackmail" and have called on the People's Bank of China to retaliate. The Korean economy is also feeling the heat from the depreciating Yen as Korea directly competes with Japanese autos and electronic products; therefore the Korean government is more direct in showing its concerns about the depreciating Yen and wants the G-20 to reconsider its position on giving Japan a free pass to depreciate its currency. South Korea's finance minister has said that, "we will do what we can" to deal with the weak Yen. Therefore in this quarter, I expect Asian economies including South Korea and China to pursue monetary easing programs of their own to track the depreciating Yen; and I believe that the only winner from this currency debasing competition in Asia would be gold.
Gold has suffered enough in the past two quarters, and the sentiment around the metal is overly bearish. In my opinion, continued bond buying from the Fed in light of a weakening US economy, headwinds from Europe, and currency debasement programs in Asia should boost gold in the coming quarter. Therefore I would recommend buying gold, both the metal and gold miners' stocks, in terms of the Euro and Yen this quarter.
Additional disclosure: I own physical gold.