In July, August, and September, gold was looking very bullish as the SPDR Gold Trust ETF (GLD) grew by 10.8% during these three months. This trend continued through the first week of October, but it appears gold has peaked for now as it is down over 3.5% in the last month. In this article, I will provide three reasons why gold is due to see another bull run in the near future.
The Fiscal Cliff
Many of you are aware of the United States fiscal cliff when, at the beginning of 2013, a number of laws will expire or go into effect. This will raise government revenue 19.6%, lower spending by less than 1%, and potentially trigger a small recession in the beginning of 2013. Republicans are currently threatening to allow this recession, which would create a very volatile stock market but, at the same time, put a major dent in our national deficit.
Historically, the best way to bet on a volatile stock market without using zero-sum game derivatives is to invest in gold. When gold prices reached an all-time high in 2011, it occurred during a very volatile market triggered by the European debt crisis. Being "pushed off the fiscal cliff" could trigger a similar effect that would potentially send gold prices north of $2,000 per troy ounce. Even if some measures are taken to avoid a recession, there will still be very high volatility leading up to the end of the year, followed by widespread speculation that the measures taken only delayed an inevitable recession in the future. From the current look of things, I believe there is about a 90% chance the fiscal cliff will make markets more volatile and send gold prices at least 8% higher.
India and China
Much of the reason for gold's decline from the $1,900 mark stemmed from China's and India's economies growing slower than expected. This is very important as the two countries accounted for over half of the world's gold jewelry consumption in 2010, and this number is expected to increase going forward. About 50% of the world's gold consumption is used for jewelry, 40% is used for investments, and the other 10% is used for industrial purposes. Since we are no longer on the gold standard, the investments portion of the world's gold consumption is highly influenced by jewelry pricing. The industrial gold segment has very little, if any, pull on pricing.
Recent news shows China's economy beginning to grow at high rates again, and India's economy is likely to follow. This should increase gold demand in these countries and trigger an increase in gold prices. It will take longer than the fiscal cliff for these factors to directly affect gold prices, but the news of the Chinese economy growing has not yet positively affected gold prices. I believe it will move spot prices up in four to six months.
Lack of Supply
Barrick Gold (ABX) disappointed badly in earnings today as shares dropped 9.38%. Much of its earnings miss stemmed from the company's gold production dropping by 7.7%. On this news, many other gold miners faced a bearish day, including Newmont Mining (NEM), down 2.49%, and Kinross Gold (KGC), down 0.9%. A stall in gold production coupled with the potential increases in demand, as described above, could send gold prices higher. It may sound strange that a bearish gold production industry could send gold prices higher, but gold producer stock prices and gold prices are not highly correlated.
On the heels of a potential bear market, now is a great time to buy gold through ETFs such as SPDR Gold Trust ETF and iShares Gold Trust (IAU). I believe there is a very good chance that gold spot prices will at least eclipse the $1,800 mark, and could potentially crack $2,000. In addition to this, I believe there is very little downside potential, and being long gold can be a great way to battle looming volatility by holding a long position in an appreciating asset.