Gold May Have A Great 2014, But Be Patient

Mar. 3.14 | About: SPDR Gold (GLD)

SPDR Gold Shares (GLD) ETF is up about 13% from its lows in December, but GLD is down from where it was in January 2013 ($160), and down from where it was in January 2012 (closer to $180) as well. The shiny metal was on a tear during the credit crisis, because investor's perception was that there was nowhere else to put your money back then; since then the FOMC-stimulus really kicked in, this happened last year, and when it did GLD tanked.

Interestingly, GLD is up solidly this year, especially compared the S&P, which is down slightly (at the time this was written), which begs the question: do investors have the same perception as they did during the credit crisis?

My personal opinion is yes; eventually that is exactly what is going to happen. The economic recovery and the stock market rally, including the appreciation in real estate prices, was absolutely a result of the massive liquidity injections of the FOMC, and the path to tapering has already begun.

If that continues the economy will revert back to a much more normalized condition, and my longer term macroeconomic analysis, The Investment Rate, proves what that normal environment looks like. To keep it simple, the economy today is in the exact same condition as it was during Stagflation and the Great Depression, the only difference is that the FOMC has printed $4 Trillion and staved off a Greater Depression.

However, they cannot prevent the weakness from coming, they can only offset it, and if they intend to offset all related weakness throughout the entire duration they will need to print money through 2023.

When they back off of the gas pedal, when they taper, the economy begins to revert back to normal, and that means economic weakness.

NEW investment dollars drive economic growth (not old money), and the $4 Trillion that has already been injected is NO LONGER new. The pace would actually need to be accelerated, not tapered, for the trend to continue. The rate of change in the amount of new money available to be invested into the US economy on a naturalized basis (no stimulus) declines precipitously throughout the economic period we are in today (according to my work), and because it is new money that matters most, the economy absolutely is in trouble if the FOMC pulls the needle.

In addition, because the US Treasury acts as a drain on liquidity, offsetting the FOMC's stimulus effort, the path to a liquidity-neutral environment is much closer than most people think. Stimulus does NOT need to go to zero for the economy to revert to its naturalized state. All that needs to happen is the positive influence on liquidity given the combined efforts of the US Treasury and FOMC must revert to liquidity neutral, or worse.

Also, take notice, that we also have two contributing factors now in the reduction of liquidity. The first comes from The Investment Rate, the natural demographically-based decline in investment trends, but the second is coming from the FOMC's tapering.

Lower liquidity means lower demand, means less economic activity, means slower economic growth, translates into major concerns for the stock market, real estate, and any other asset class that depends on new investment dollars to grow.

If these continue, investors in GLD may be very happy this year, but be cautious at these levels (there may be a better time to buy). The ETF is approaching a level of longer term resistance as that is identified in our real time trading report for GLD, so it is not clear sailing, but the scenario is favorable if tapering continues. Investors may not perceive that there is any better place to be than in Gold once we get into a liquidity-neutral environment, but today GLD is not running on the heels of that concern. Be cautious chasing it right now, but it should be perceived as a possible winner throughout 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.