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Is Gold is Making a Comeback?

One of my best calls of the year was to plead with readers to avoid gold like the plague, periodically dipping in on the short side only. The barbarous relic has been in a bear market since it peaked at $1,922 an ounce at the end of August last year. Gold shares have fared much worse, with lead stock Barrack Gold (ABX) dropping 36% since then and the gold miners ETF (GDX) suffering a heart rending 43% haircut.

However, the recent price action suggests that hard times may be over for this hardest of all assets. Despite repeated attempts, the yellow metal has failed to break down below the $1,500 support level that I have been broadcasting as the line in the sand.

It has rallied $100 since the last try a few weeks ago. (GDX) has performed even better, popping 23%. For the last month, the entire precious metals space has traded like it was a call option on global quantitative easing (see yesterday's piece). Dramatically worsening economic data is increasing the likelihood of further monetary easing generating a nice bid for gold.

Now the calendar is about to ride to the rescue as a close ally. It turns out that in recent years, there has been a major seasonal element to the gold trade, almost as good as the November/May cycle that drives the stock market. Gold typically sees a summer low. Then traders start anticipating the September Indian gold season when the purchase of gifts and dowries become a big price driver. That explains why India, with a population of 1.2 billion, is the world's largest gold buyer.

Next comes the Christmas jewelry buying season in western countries. That is followed by the gift giving and debt repayments during the Chinese Lunar New Year, during which we see multi month peaks in the yellow metal. That is exactly what we saw this year. The only weakness in this argument is that a slowing Chinese economy could generate less demand this time.

These are heady inflows into such a small space. All of the gold mined in human history, from King Solomon's mines, to the bars still in Swiss bank vaults bearing Nazi eagles (I've seen them) would only fill 2.5 Olympic sized swimming pools. That amounts to 5.3 billion ounces, about $8.6 trillion at today's prices. For you trivia freaks out there, that is a cube with 66 feet on an edge. China is the largest producer (13.1%), followed by Australia (10%) and the US (8.8%).

Peak gold may well be upon us. Production has been falling for a decade, although it reached 94 million ounces last year worth $153 billion at today's prices. That would rank gold 5th as a Fortune 500 company, just ahead of General Electric (GE). It is also only .38% of global public debt markets worth $40 trillion.

That is not much when you have the entire world bidding for it, governments and individuals alike. Talk about getting a camel through the eye of a needle! We may well see the bull market end only when those two asset classes, government bonds and gold, see outstanding values reach parity, implying a major increase in gold prices from here. That is well above my own personal target of the old inflation adjusted high of $2,300. No wonder buying is spilling out into the other precious metals, silver (SLV), platinum (PPLT), and palladium (PALL).

The thumbnail technical view here is that we have broken the 50 day moving average at $1,610, so we may have a clear shot at the 200 day average at $1,680. There may be an easy $50 here for the nimble, and more if we break that. The current "RISK ON" mood certainly helps this trade.

When playing in the gold space, I always prefer to buy the futures or the (GLD), the world's second largest ETF by market cap, either outright or through a longer dated call spread. The dealing costs are far too high for trading physical bars and coins, and can run as high as 30% for a round trip. Having spent 40 years following mining companies, I can tell you that there are just way too many things that can go wrong with them for me to risk capital. They can get nationalized, suffer from incompetent management, hedge out their gold risk, get hit with strikes or floods, or get tarred by poor equity market sentiment. They also must endure the highest inflation rate of any industry, around 15%-20% a year, which hurts the bottom line.

Better just to stick with the sparkly stuff.

By. Mad Hedge Fund Trader




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  • Scott Wolf on June 20 2012 said:
    Mad Hedge Fund Trader,

    You're an idiot and clearly don't understand gold.It is true that PMs have been in a bear market for the better part of a year,but this is due to entrenched,ongoing Keynesian economic madness facilitated by Central Banks and their sovereign co-conspirators.Anyway,so what if gold and silver have been crushed.The price manipulation is just allowing the shrewd and educated citizen to acquire more!You can have your GLD and SLV ETFs;IT'S ALL WORTHLESS PAPER,genius!Good luck getting phyzz when you truly need it.Your metal only exists on paper.Mine,well,mine is in my possession!My god,40 years in the business and you're this myopic and delusional about what real money is?Perhaps you've never heard of Gresham's Law?Call the folks in Utah,they'll be happy to explain it to you.

    Gold is not a stock to be bought low and sold high,it is a wealth preserver,a medium of exchange,an arbiter of fiat money's health.In short,IT IS AND ALWAYS HAS BEEN MONEY.

    You can continue to live in your normalcy bias world of fiat dollars,enjoy. Those of us who invoke reason when evaluating global markets now completely dependent on 0% interest rates,LIBOR fraud,MERS fraud,COMEX fraud,endless debt to pay for previous debt,bailouts,QE,high frequency trading,commodity arbitrage,regulatory complicity,and OTC derivative interest rate swaps,are just patiently waiting for the seminal event that WILL knock the USDollar off its lofty perch.So keep faith in your high priests of finance,I'll take my chances with that "barbarous relic".
  • Claude B. on June 23 2012 said:
    Scott, I perfectly agree with you.

    Gold is not a paper thing.
    It is REAL MONEY.
  • warwick on June 25 2012 said:
    Gold bugs get a bad reputation because of bigoted notes like the comments above. The man is a BUYER!!! How could you not get that??? Duh!
  • Scott Wolf on June 27 2012 said:
    Warwick,

    He's playing the paper game.Again,to him,gold is a trade not a recognized currency.This is not the same as buying physical and holding it regardless of fiat price volatility.Duh!!
  • John on July 17 2013 said:
    I agree with both opinions that it was just a matter of time gold market went up its still affordable . But physical is the way to go if like Claud said no matter the price ,well 18 19 hundred gold kept me on the side line . Silver has I many more uses than gold the us had tons of reserves and keep as we hear running out of the lady liberty late or a month before last year .With all this new money from the unconstitutional fed all the prophets from silver and all the gold don't think we have as much as they claim. I say everyone who could afford it some can afford gold but silver is at a bargain any one who's has some means can fork over 22.00 buy buy buy and let's trade our devalued dollars into precious metals and vote with our cash for sound money.

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