The Facebook Gold Rally

 |  Includes: ABX, ANV, AU, FB, GLD
by: David White

This market is oversold after almost two weeks of moving down strongly. Even gold moved down. One might think that gold would get a bid in a "fear" environment. However, when fear turns to terror, the "sell everything" mantra takes over. Hence gold is oversold along with everything else. Gold rallied yesterday. I believe this was largely in expectation of the Facebook IPO (NASDAQ:FB), which takes place on Friday May 18, 2012. The reminder that many are buying Facebook changed the market emotion from terror to a more mild fear. This allowed the rally, which seems likely to continue Friday. It may continue all next week, if the negative news from Europe eases a bit. With "terror" in the rear view mirror, investors again want to own gold versus many other assets. If "terror" can stay in the rear view mirror, the rally can continue. The two year chart of GLD (an ETF which buys and holds the gold metal) shows the technical aspects of this trade.

(Click to enlarge)

The slow stochastic sub chart shows that GLD is oversold. It rallied yesterday, and technically it should continue to rally for a while. It just bounced off the terrifically strong support at approximately $150. The yellow line shows the many points of previous support. I cannot see a point in the chart that has stronger support. How long the rally lasts will depend on a lot of factors, but technically it should rally to the $157 to $164 range at least.

This does not mean gold will just keep going up from here. It could, but I doubt it. The Indian government has twice raised the import tax on gold by 2% this year. It also put a 1% excise tax on gold sales. However, after much protest from merchant's it repealed this tax. Still the 4% import tax on gold has put a huge damper on Indian imports. The World Gold Council expects Indian gold demand to fall to 800-900 tonnes in 2012 from 933 tonnes in 2011. In Q1 consumer demand for gold declined by 29% to 207.6 tonnes. Chinese demand partially compensated for this with a 10% rise in consumer demand to 255.2 tonnes. However, the Chinese demand increases are expected to abate as the year goes on. The 4% in Indian import taxes remain. The rupee is continuing to depreciate, and inflation in both China and India has been easing. This is expected to continue as the world economy slows. Therefore demand gold as an inflation hedge will tend to be less this year. You should factor this into the plans for your investments in the yellow metal. I should also note that a Reuters article had forecast that Indian gold demand would decrease by approximately 300 tonnes this year. That was when the 1% excise tax was still in place. However, one might expect that an adjusted estimate for a cut in demand would be more in the range of 200-250 tonnes, instead of the much more modest World Gold Council estimated cut. The Indian government is also considering a further 2% tax on jewelry purchases of approximately more than $4000. The reader can make his or her own judgment on this and on the likely results of the new 4% in import taxes.

For the moment the World Gold Council seems to be backing the "almost unchanged" amount of demand. I am not sure I believe this. Still the positivity of this view by the major analyst of the gold market should allow gold to rise in the near term.

If you are a bit more daring, you may also consider buying gold mining equities. A few of the best that are far oversold are Barrick Gold Corp. (NYSE:ABX), AngloGold Ashanti Ltd. (NYSE:AU), and Allied Nevada Gold Corp. (NYSEMKT:ANV). All of these are high growth gold stocks with excellent prospects going forward.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, ABX, AU, ANV, GG over the next 72 hours.