Gold - Why The Next Move Is Up

Includes: BAC, CDE, GDX, GLD, NEM
by: Markos Kaminis

Despite the headlines referring to gold's supposed weakness on FOMC inaction, truth be told, gold has held up relatively well. New York Spot Gold fell just 0.26% Thursday and is down a bit more from Monday. After a rough time in Asia, gold recovered Thursday in its New York trading session. Because of a gap open lower, as gold had traded down in Asia overnight, both the SPDR Gold Shares (NYSE: GLD) and the Market Vectors Gold Miners ETF (NYSE: GDX) closed down fractionally Thursday. However, the securities tracking gold and gold miners, respectively, strengthened throughout the day.

Chart forSPDR Gold Shares

The market has gotten over its initial disappointment with the FOMC meeting minutes, and the implied lack of conviction from the Fed for a new round of quantitative easing. It didn't hurt that Bank of America's (NYSE: BAC) Merrill Lynch said gold would move higher by year end. Merrill's Francisco Blanch, the investment company's Head of Global Commodity and Multi-Asset Strategy Research, said the Federal Reserve would likely initiate an asset purchase program of up to $500 billion in the second half of this year. I think that most of us in the investment community would agree, despite however useless we might believe the endeavor to be. Blanch said, this would likely drive gold much higher, referring to $2,000 per troy ounce as a relative figure. That would mark a 26% gain from where we stand at the hour of publishing here, or $1584.70 on spot gold.

Federal Reserve Chairman Ben Bernanke has stated that quantitative easing will have diminishing returns. This is probably why gold is off its high from earlier this year. Though, the reason gold is off 17% from its September 2011 high of $1918 is because of revived economic hopes, which have since diminished. Obviously, that situation is reversing now, and so Merrill Lynch could very well be right with its timeline.

The two-year chart of the SPDR Gold Trust seems to show a settling here, and I think the next sustained move will be higher, especially when the Fed eventually acts.

Chart forSPDR Gold Shares

In an interview on Bloomberg Radio Thursday evening, Bloomberg's Pimm Fox interviewed Sterne Agee analyst Michael Dudas. Over the course of a long conversation, through which Dudas recommended both Newmont Mining (NYSE: NEM) and Coeur d'Alene Mines (NYSE: CDE), he added another reason to favor gold. Dudas said many of the world's central banks were once again diversifying away their dollar reserves in favor of gold.

This leads me to return to the key reason I favor gold so much over the long term. It is precisely due to my view that gold is a currency, the core and emergency currency of mankind in fact. Given my belief that the central bank actions of today are helping to set up a tomorrow where fiat currency is undermined, I continue to favor gold for the long term. Given my view for near-term economic strife and Fed flailing, I likewise favor gold for the short term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.