I have had ambivalent feelings for a while towards the last leg of the gold bull market. For some background I started to amass a physical holding in gold via gold coins that were purchased in 2003 through 2005. I happily held and doubled my money in them when I unloaded them in 2007. To say the least I was early but more importantly for purposes of this article I have not held a position since.
There are 3 major events/headlines that have conspired to make me believe now is an excellent opportunity to go long gold for some capital gains. I don't see a double from here, however a double digit gain would suit me quite nicely. 3 reasons follow:
- The Fed announcement on Wednesday Jan 25th that they will keep interest rates low into 2014. I interpret this to mean that the US dollar will stay weak. Gold does terribly during a dollar bull market as seen during the 1980s. After this announcement I see little chance in a dollar rally from here.
- The major world banks are all working in concert to keep interests low throughout the industrialized world. The three biggest world currencies US dollar, Japanese yen and European Union dollar, all have short term rates at zero or rapidly approaching. By keeping rates so low, the central banks are hoping for a bit of inflation to help make their debt load more manageable. All three have debt as a percentage of GDP approaching 100% (in the US) and some even higher. With interest rates effectively at zero the cost of holding gold becomes even cheaper.
- The strengthening of the Euro verses the US dollar. I was intrigued with gold after the coordinated central bank action late last year but watched gold correct due to the rise of the dollar/ fall of the euro. I wanted to see if the corresponding bond auction of the PIGS would be well received and much to my surprise the auctions have gone very well and at much lower rates than expected. I am even optimistic that the Greek debt deal will be agreed to shortly and on favorable terms (for the Euro zone, not for the bond holders).
For a bit of a longer term perspective the 80s through 1999 was a period of a strong US economy culminating with a strong US dollar. The 1996-1999 period was the strongest with the government actually running a balanced budget and in 1999 a surplus! My how things have definitely changed.
This chart shows US dollar index in black with GLD overlayed in yellow. Notice Gld sold off in the August 2008 through November 2008 period while the DXY was rising. Once it stopped Gld resumed its advance. Chart courtesy of Bigcharts.com
Pattern repeated again in September of this year, notice dollar starts to gain and gold sells off.
Chart courtesy of Bigcharts.com
To summarize I believe that the table is set for gold to run farther. The risk I see to it will be if the US dollar exhibits strength and begins to appreciate against the world currencies. With 2012 being a presidential election year with no federal budget and possible further stimulus from the Fed, I see the chance of a dollar rally at no more than 10%. Even that percentage may prove to be generous.
Disclosure: I entered a long position in Spiders Gold Trust (GLD) on Jan 31st.