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Gold is Breaking out to the Upside

Look at the $25 move in gold today, and it's clear that an upside breakout is imminent. It made this move on a whisper of a rumour about a speculation that China may take out an eyedropper and tickle their economy with a few more drops of stimulus.

This is proof positive of how sensitive the barbarous relic is to global QE/stimulus. Given that we can expect a steady dose of this medication from central bankers for years to come, the outlook for gold today is probably better than for any other single asset class. Gold charts are breaking out all over and have already broken out to new all-time highs against the Swiss franc, the Australian dollar, and the Euro. It is just a matter of time before the party spreads to the dollar.

Why is monetary easing so crucial for gold's outlook? Take a look at the chart below showing the Federal Reserve Bank of St. Louis adjusted monetary base. When QE2 was launched, the base grew exponentially, and so did the price of gold, from $1,100 an ounce to $1,922. When QE2 ended in June, 2011 the monetary base flat-lined, and so did the barbarous relic, falling back to $1,500.

So what will QE3 do for the price of gold? The really easy answer here is that it doubles again to $3,000, possibly within the anticipated 24-month life of the current round of monetary easing. Since I am a cautious cheapskate, I am pegging my target at the old inflation adjusted high of $2,300. One thing is certain. To mix a few metaphors, gold bugs are going to be watching the monthly updates of this chart like hawks. This is why I tell guests at my global strategy luncheons that this is the only chart they need to look at for the foreseeable future.

How long will this love-fest last? Look at the next chart of global growth prospects, which are headed in a generally southern direction. Consider the inverse of this chart to be the likelihood of further, more aggressive monetary easings -- gold bulls absolutely love it.

Use every dip in gold to load the boat. Buy calls, call spreads, or outright shares in the gold ETF (GLD). Look at the biggest gold miners, like Barrack Gold (ABX) and Newmont Mining (NEM), the big miner's ETF (GDX), and skip the juniors. The more aggressive can buy gold futures to take advantage of the 18:1 leverage. You might buy some silver too.

Zero Monetary Growth

Cyclical Headwinds

SPDR Gold Trust Shares 8

SPDR Gold Trust Shares/Euro

SPDR GOld Trust Shares/Australian Dollar




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