Based on several bullish technical indicators, important macro developments, increased demand from China and India and a potential non-tapering announcement from the Federal Reserve, I believe gold (GLD) has the potential to push above $1,500 in September from the current price of $1,375.
I will go over some of these points below and offer investors some ways to profit from a potential increase in the price of gold.
First, here are three positive technical indicators for gold:
Inverted Head-and-Shoulders Pattern
Gold has formed an inverted, inverse or reverse head-and-shoulders pattern, as you'll see in the chart below. These are the three characteristics of an inverted head-and-shoulders pattern, according to Investopedia.com:
1. The price falls to a trough and then rises.
2. The price falls below the former trough and then rises again.
3. Finally, the price falls again, but not as far as the second trough.
Another positive technical indicator for gold is the fact that it recently crossed over the center line on the MACD.
"A bullish centerline crossover occurs when the MACD Line moves above the zero line to turn positive" StockCharts.com.
Gold crossed over the 50-day moving average in early August ($1,306). The next stop for gold could be the 200-day moving average ($1,516).
You'll see from this 2-year chart below that the bottom was most likely in late June, when gold was under 30 on the relative strength indicator (RSI).
The month of June 2013 was one of the worst on record for gold with the price hitting $1180 at one point.
This weakness in June shouldn't come as a shock to those who know that June is historically the worst performing month for gold.
I also shared this same chart in a previous article "Gold: Why I'm Bullish in the Short-Term".
You'll see above that historically, the best months for gold are September and November.
Positive Developments for Gold
- India's government has tried to reduce gold imports to try and reduce their trade deficit. However, it appears that their effort has failed as gold buying remains very strong.
According to a recent Reuters article, gold demand in China and India could reach a record 1,000 tons each in 2013. China is also on pace to pass India as the world's largest buyer of gold:
"India's demand reached 566 tonnes in the first half of the year, a 50 percent jump but still lower than China's 600 tonnes.
The demand from India and China has partly compensated for the near 600-tonne outflow from gold-backed exchange-traded funds. Global gold demand for the second quarter fell 12 percent because of the ETF outflows."
The Fed will hold a critical FOMC meeting on September 17-18. Some expect they will announce the beginning of tapering of their monthly QE program. However, I see this as unlikely given the current state of the economy.
While some will argue that tapering isn't tightening, I would simply point to the recent rise interest rates, which I think gives us a small preview of what will happen if they do in fact slow down QE purchases.
If you think rates are heading higher you should consider "The Bernanke Taper Trade".
Indian Wedding Season is Coming Up
This is another potential catalyst for a short-term increase in the price of gold and is perhaps one of the main reasons why gold has performed so well in the month of November:
"Last November, on a particularly auspicious date on the Hindu calendar, a staggering 60,000 weddings took place in New Delhi alone - all in one evening - bringing traffic in the city to a standstill.
The non-stop nuptials won't begin in earnest until October, when the monsoon rains have disappeared and the summer heat has melted away, reaching a crescendo in November and December, and then again in the spring.
Budgets for a high-end Indian wedding can easily reach around $2 million, including the cost of events, travel, food, clothing and especially jewelry."
...about 50 percent of India's gold demand can be attributed to weddings, which means more than 400 tonnes of gold is exchanged at weddings in India each year, making it the single largest component of the Indian wedding market..."
"Inside India's Big Fat $38 Billion Wedding Market" BusinessOfFashion.com
This alone should make the physical supply of gold very tight.
How to Profit From an Increase in the Gold Price
While buying the actual physical metal itself is not a bad strategy at all, I personally own several equities that are highly leveraged to the price of gold.
Royalty streaming companies continue to be my number one favorite play. If you are not familiar with them, these companies don't actually mine gold but finance the mines and get a portion of the metal at a fixed price.
These companies are generally lower risk than traditional mining companies for several reasons which I will discuss briefly here:
- Royalty companies get their metal at a fixed price, making them a terrific inflation hedge. Miners' costs increase, but royalty companies' do not.
- The companies own streams or NSRs on several mines, as opposed to certain mining companies that get their revenue from a single mine or just a few mines.
- They don't have any other associated costs with getting a mine up and running, and if anything goes wrong at a mine they don't have to contribute more capital to it.
For the actual mining companies, I like Alamos Gold (AGI), one of the lowest cost producers in the world. Small cap mining company Luna Gold (OTCQX:LGCUF) is a perfect play for someone willing to take on a little more risk.
These are much riskier than royalty and mining companies because most of them have no cash flow coming in, so you have to be careful.
The only pure exploration company I can recommend right now is Pilot Gold (OTCPK:PLGTF), a $100 million company that is well funded with $30 million in cash and very little debt. Pilot's projects have tremendous exploration potential and are located in Turkey and Nevada.
Pilot also has an excellent management team - the same management and technical teams that built Fronteer Gold, which was bought by Newmont Mining Corporation (NEM) for $2.3 billion. I plan on writing a future article on Pilot, so please follow me here on Seeking Alpha if you are interested.
I expect September and November to be outstanding months for gold. I feel very comfortable calling the June bottom here and will continue to add shares of related companies on any dips going forward.