Gold is currently in the midst of making its first real upward move since January. Over the past few months, in massive contrast to last August, the shiny stuff has suffered immensely as investors have flocked to the dollar as the euro was sold hard. Now oddly enough, despite the euro trading at its lowest point since 2010, gold has crossed above its 50-day moving average.
(click to enlarge)
As seen in the above chart, GLD bounced off the $148 level three times before breaking out. The cross above the 50-DMA is a major technical event, although the SMA is declining and the price needs to hold to confirm a new uptrend.
Fundamentals
A globally coordinated central bank "put" on the overall market, and therefore the price of gold (since they must print), appears very likely right now. The reality is that while markets probably haven't declined quite enough for the Fed to actually initiate a new LSAP program, and liquidity for the EU periphery hasn't dried up to the point where a three-year LTRO is announced by the ECB, the gold market knows these options will come into play the second things get really bad.
On the other hand, the dollar is more likely than not to get significantly stronger over the next few months. The Greece elections on June 17, are likely to lead to Greece's exit from the EU, unless the New Democracy party can pull out the majority vote. Despite the potential for serious dollar appreciation, overall market capitulation should lead to a flock to limited safe-haven assets, notably gold. The loss of confidence in a major currency like the euro will result in traders piling into the "currency of last-resort;" gold.
Conclusions
There are two potential major scenarios at play here:
- The "Muddle-through" environment comes back as a result of more central bank balance sheet expansion, and gold's gains are magnified by the double whammy of asset purchases and a crisis of confidence in the euro, should Greece be pushed out of the EU. If Greece's elections turn favorably for the pro-bailout parties, then it'll be risk-on once again and gold will also perform nicely.
- Gold takes a short-term hit in the event of a negative reaction to Bernanke's testimony today, but eventually regains safe-haven status as investors flock to one of the few safe assets available in the marketplace; especially when one considers the crowded treasury and dollar trades.
Traders should not underestimate the potential for gold to make a quick move up to $2000 an ounce. At $1620 an ounce, this would be nearly a 25% gain, but the macro environment out there has plenty of significant catalysts to power gold toward last year's highs.
Lastly, current fair value relative to stocks is around $1900 an ounce. Gold currently offers an interesting compression trade.
The miners have also been sold far too much relative to gold on a long-term basis, with Goldcorp (GG) and Newmont (NEM) offering particularly good long-term entry points currently. Otherwise, the GLD ETF (GLD) will do the job.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD over the next 72 hours.
