The Great Gold Recovery: It's Official This Time

by: Han Jun Low

Gold has had a wild ride, and although it had a false recovery in the mid to end of July period, where it suddenly and inexplicably crashed back below the 1300 resistance level, I believe that this time it is primed to scale new heights. This is because there has been renewed optimism which supports the fundamentals that I had discussed previously. This optimism is the change in sentiment that I believe is likely to finally drive technicals closer to the fundamentals.

The above chart plots my, ahem, personal portfolio of shares against the major indexes, such as the Dow Jones, Nasdaq, ASX 200, Nikkei 200 and the Hang Seng. My portfolio happens to be the light blue line that diverges from the others, and contains gold miners like IAMGOLD Corp. (NYSE:IAG), Sibanye Gold Ltd (NYSE:SBGL), Silver Wheaton Corp. (NYSE:SLW), Goldcorp Inc. (NYSE:GG) and Kinross Gold Corp. (NYSE:KGC) among several others. This article however is not entirely about shameless self-promotion; to prove this, I have included the chart below, which plots my portfolio against several mining indices and ETFs.

Gold shares have done well, rising on the back of the gold spot's recovery. Gold's meteoric rise ran counter to all expectations, especially the mainstream media, but even amongst traditional gold bugs like Jim Rogers, who had only recently claimed that although long gold, he saw gold falling all the way to 900 and that even the 'faithful' would have had to leave the market before it had bottomed, a phenomena that he did not believe had occurred at that time (ironic considering that he is widely considered to be the most 'faithful' of the gold bugs). The interesting thing to note regarding this chart however is that GLD (the golden-yellow line) has only just recovered to where it had been at the beginning of my monitoring; yet we also observe an extreme uptick in all of the mining ETFs; this climb was far greater than is expected, based on the previous price levels of these ETFs in relation to GLD. Why is there now more optimism regarding the future gold spot (That is what a miner's share price is based on essentially, and GLD gives a good gauge for spot) than there had been for three months? I shall discuss possible reasons, going from the least likely to most likely.

Reason Number 1
Sentiment is good from a purely technical perspective, sending speculators into a frenzy, bidding the price of gold shares higher simply because the gold spot price appears to be tracking up. This reason is possible, as spot appears to have largely stabilized at around the 1360-1370 price range at the time I had written this article, before the weekend (update: after the weekend it has risen past 1380; unfortunately my article had not been published earlier, my apologies). This means that the gold spot has broken past the mid to end of July's "false-recovery's" peak, which would indicate relative strength in the gold spot from a technical perspective. However, I do not believe that this is the true reason for optimism in the future gold spot; instead, I believe that other underlying reasons exist to support this technical perspective rather than vice-versa.

Reason Number 2
As a result of record gold outflows, GLD has in fact shot itself in the foot, via premature profit-taking on the part of their so-called 'authorized participants'. It is thus valued less because it is rumored to have insufficient physical to cover the paper that it has floating around. This would cause it to be a less effective indicator of spot than other ETFs. However, compared to gold ETFs like PHYS however, it shows little divergence. Compared to foreign ETFs like TSE:HUG and HKG:3081, it has performed slightly better, so there really is no evidence that GLD is performing worse than other ETFs because of this belief and thus no evidence to show that GLD is a poor indicator of spot.

Reason Number 3
Gold has been bullied for so long, gold bugs who had been itching for any good news have all returned, with a vengeance. This reason is plausible, but unlikely, seeing as real gold bugs would have bought into the lows rather than when gold is on the way up. Still, I believe that a few small-time speculators would likely have returned to the market, but with greater trepidation considering gold's recent crash.

Reason Number 4

The fundamental argument for gold has strengthened, or it has won over more people than there had been before. I would like to point out that the fundamentals had always been strong; the only new data to be had would be that the US economy is showing some of the problems that had long been discussed by gold bugs. Though the 'recovery' is still in full swing it is possible that more and more people are looking at the fine-print. One has to wonder where such distrust for mainstream financial programs and the government might have come from.

Reason Number 5
Weaker hands have nearly all been driven out of the market, leaving only serious gold investors, and also perhaps a large number of speculative investors who had been hyping the demise of gold, possibly to accumulate large holdings cheaply *cough* JPMorgan *cough* by possibly manipulating others to short gold *Cough* Goldman Sachs *Wheeze* who are now openly hyping gold and particularly gold mining shares (after possibly front-running everyone) based on the fundamentals that had been present all the while (fundamentals I and so many others had mentioned before) and other superficial short-run sentiment self-justifications. Amazing how alleged front-running and painting the tape is not illegal if you happen to be a large investment bank. Did I mention that they move aluminium around warehouses legally to potentially slow down delivery and increase prices?

The New Gold Rally
Regardless of which of these five reasons you choose to believe, gold is set to drive higher, a prediction that experts, pundits, and outrageous manipulators alike have come to agree upon. In the short-run gold and gold shares are set to drive to new heights, but beware that in the medium-run sentiment might turn, crashing prices once more, especially if gold miners continue to diverge from spot at an overly-optimistic pace. In the long-run I am as always bullish gold, unless the world suddenly discovers the lost art of transmutation, as well as the undiscovered art of honest monetary policy.

Random Speculation

I suspect that the investment banks had intended to buy even more gold and gold shares than they already had, because they had not expected gold to rally so suddenly. This is because JPMorgan's announcement came after gold's rally, in a recent announcement on the 15th, rather than before the rally had even started to pick up steam, a sign that JPMorgan was merely following the tide (in order to ride the momentum) rather than influencing it, or 'predicting' it, as they would doubtlessly prefer to do. For now. The false rally in the mid to end of July period symbolized this sentiment perfectly in terms of how trading had been playing out, for the more cynical watchers of the gold spot.

So if everyone agrees that gold is more than a shiny yellow metal, I guess I have only one last thing to say… Fly my monkeys, fly!

Disclosure: I am long SBGL, OTCPK:ZIJMY, ABX. 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.