Gold remains joined in a tough fight.
After peaking in early September, Gold has been locked in a steady downtrend over the last few months and has endured a -20% decline along the way. This has caused many to wonder in the past few months whether the rally in Gold that began a decade ago may finally be coming to an end.
While it certainly has been a tough road for Gold these last few months, a variety of factors suggest that the Gold bull market remains very much intact. Moreover, it increasingly looks like Gold is regaining its footing in working to resume moving higher.
First, the picture for Gold is starting to improve from a technical perspective. Several securities are available for those seeking to track the Gold market including the SPDR Gold Trust (NYSEARCA:GLD), the iShares COMEX Gold Trust (NYSEARCA:IAU) and the Sprott Physical Gold Trust (NYSEARCA:PHYS). And while the themes discussed in this article applies to all of the above, I will focus on the SPDR Gold Trust for the purpose of this analysis. After it's September peak, Gold has fallen to break both its 150-day and 200-day moving averages for the first time in nearly three years. But after bottoming on the second to last trading day of 2011, Gold has been working its way higher ever since.
Just last week, Gold managed to reclaim its 200-day moving average, although it will be important to hold this level in the coming days to confirm that new support has been established. A variety of supporting technical indicators are also working in Gold's favor. It recently notched a bullish crossover in terms of Relative Strength, momentum is accelerating to the upside and money flow readings have returned to positive territory for the first time since the beginning of December. Finally, Gold is still trading well above previous highs from as recently as a few months ago in July 2011, which suggests that any recent breakdown is still short-term in nature. All of these factors suggest that Gold may have more near-term upside ahead.
The fundamentals behind owning Gold also continue to improve.
First, the decade long bull market in Gold has been driven by a weak dollar policy here in the U.S. While the U.S. dollar (NYSEARCA:UUP) has strengthened recently, this is more a result of the persistent problems in Europe and the capital flight for safety in the U.S. than any meaningful shift in philosophy about the dollar here in the U.S. While a strengthening dollar will certainly be a drag on the Gold price in the near-term, as long as the bias remains toward a weak dollar and easy monetary policy in the U.S., Gold is likely to continue to perform well.
Also, Gold remains a currency alternative that is becoming increasingly attractive as the situation in Europe deteriorates further. Global central banks have been actively engaged in competitive currency debasement for several years since the beginning of the financial crisis. This has included aggressively easy monetary policies to combat the ongoing financial crisis. This alone is bullish for Gold, particularly if the recent primary dealer survey implying a 60% probability for QE3 in the coming months turns out to be correct. But as we move forward into 2012, the ultimate fate of one of these currencies is coming increasingly into question. The Euro currency, which is the second most traded global currency by value in the world, may cease to survive if the situation in Europe comes to a chaotic end. Given the potential for such an event, the demand for a currency alternative will rise. And Gold represents an ideal currency alternative during times of crisis since it cannot be debased.
Finally, Gold will continue to have appeal as long as the pricing environment remains unstable. If global monetary policy makers act aggressively, the eventual outcome is likely to be higher than normal inflation. And if policy makers step back (or are overwhelmed) and the global economy slides back into recession (or worse), the resulting outcome would most likely be deflation. Both of these outcomes are supportive of higher Gold prices.
None of this means that Gold might not endure further challenges in the near-term. From a technical perspective, it still must break out above the downward sloping trend line that currently resides at its 150-day moving average around $1,675 on the spot price or $163 on the GLD. And it will always be subject to short-term sell offs driven by increased exchange margin requirements and periods of liquidation along the way. But despite these short-term forces, the long-term technical and fundamental forces behind the Gold price remain very much in tact.
Thus, patience will likely be required in the coming months as Gold continues to work through recent challenges, but such patience should be rewarded in the end.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
Disclosure: I am long GLD.