Despite claims from the "all mighty Bernank" that gold is not money, gold has been rising at an accelerated rate in recent trading sessions on concerns over any number of different reasons: Weaker than expected economic growth; the debt ceiling potentially not being raised; the possibility of default; Europe sovereign debt crisis du jour. All of these led to $1,600+ an ounce gold that looks like a runaway freight train.
“Increasing the debt ceiling is not going to make the debt go away, while the debt problems in Europe aren't going to be resolved overnight, and we're seeing all these getting reflected in the weaker economic numbers,” Zhang Yingying, an analyst at brokerage Galaxy Futures Co., told Bloomberg.
Gold has climbed to levels not seen ever in both New York and London trading, and if we continue to see weak economic data from the U.S. and abroad, there could be no stopping the gold train. This week the July ISM data was released and came in well below expectations, at a reading of 50.9. Expectations were for a reading over 54. Over 50 indicates economic expansion, but just barely.
“All the ongoing economic uncertainty and fears of a downgrade of the U.S. AAA sovereign rating are gold supportive,” Andrey Kryuchenkov, an analyst at VTB Capital in London, wrote in a report. “Weak macro numbers would also delay the tightening cycle in the U.S.”
Gold actually dipped yesterday after the House of Representatives passed a bill to raise the U.S. debt limit and cut federal spending, with the Senate voting on the bill yesterday. That was no matter, and gold is zooming again this morning, up another $19 an ounce. So far, gold is up 15% this year, up 11 years in a row. We have seen calls for $2,000 an ounce by the end of the year. Jim Rogers, noted investor and U.S. dollar bear, has said that gold will continue to soar on the policies of the U.S. government.
Gary Halverson, regional Australia-Pacific president at Barrick Gold Corp. (NYSE:ABX), said that prices are “well-supported at current levels." We continue to see strong demand from foreign central banks, retail investors, and speculators. In fact, the Bank of Korea bought 25 tons over a one-month period from June to July for the first time since 1998.
We are also moving into the Indian gold buying season, and there is no reason to think that India, with its population of nearly 1 billion, will slow down its demand.
Despite what Federal Reserve chairman Ben Bernanke thinks, gold is money. Just ask Ron Paul what he thinks. There are serious inflows going into the precious metal and it does not look like it is going to stop anytime soon. As such, traders need to be prepared for the precious metal to hit $2,000 an ounce, and perhaps beyond.
Bullish: Traders who believe that the U.S. economy will fall apart might want to consider the following trades:
- Go long everything gold you can get your hands on. Gold coins. Bars. ETFs such as SPDR Gold Trust ETF (NYSEARCA:GLD), Market Vectors Etf Trust (NYSEARCA:GDX) and Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). If everything comes crashing down at once, there is no telling where gold will go.
Bearish: Traders who believe that the U.S. economy is likely to recover faster than anyone expects may consider alternate positions:
- Since gold is well above previous highs, it may correct sharply, especially if economic data gets better now that Washington has their act together (for the moment, anyway). Shorting the aforementioned names could prove to be profitable. High beta names such as Baidu (NASDAQ:BIDU), Green Mountain (NASDAQ:GMCR) and others could move higher if the economy gets better.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.