The following is a guest post by Lawrence Carrel, author of “ETFs for the Long Run” and “Dividend Stocks for Dummies.” The
opinions expressed are his own. Full disclosure: The author has had 7
percent of his personal retirement account in a gold ETF for the past
four years.
When the price of gold plunged 20 percent last month,
many market watchers declared the gold boom over. Stalled, yes; ended,
no, according to many gold analysts, who believe the precious metal may
instead be near a new sustained rally.
“I can tell investors don’t sell off your gold,” says Martin
Murenbeeld, the chief economist at DundeeWealth. “We’re at a crossroads
here.”
During the summer, gold surged 29 percent to a record high of $1,920 a
troy ounce. This jump caused the price to drastically detach from its
200-day moving average, an important trend line in technical analysis
that the gold price had closely hugged for much of the last decade.
Technical analysts considered this jump unsustainable and in September
gold gave back most of these gains.
Gold fell to a low of $1,534.49, much to the technicians delight, and
it bounced off the 200-day moving average’s support level of $1,527.
While most gold watchers expect the metal to experience turbulence
during the next few months, the world hasn’t changed much, and gold
prices may climb higher because of its status as a safe-haven during
turbulent times.
“Have the countries around the world solved the debt crisis?” asks
Nick Barisheff, president of Bullion Management Group, a precious metals
investment company based in Toronto. “Have the bailouts ended? Have
their currencies stopped tanking?“ With the world already worried about
Greece’s fiscal problems, gold summer’s rally was sparked by fears that
the U.S. might default on its debt.
After Standard & Poor’s downgraded the U.S. debt, investors
flocked to gold as one of the few safe havens left. This raised the
specter of recession, which is never good for gold. The combination of
increased collateral requirements for trading with falling commodity and
stock markets, gold tumbled as investors sold it for liquidity amidst a
flurry of margin calls.
Still many analysts think the gold market isn’t in a bubble and that
the run-up is far from over. Analysts say a bubble is when an asset goes
up exponentially 15 to 20 times.
Gold is up seven times during the last decade. Since its low on
Sept.26, 2011, gold has jumped 9 percent. Most analysts expect the price
to retest September’s low during the next few months. If it bounces again that would be the buy signal.
Ed Carlson, Chief Market Technician at Seattle Technical Advisors.com
says gold could fall as far at $1,460. But even Carlson predicts a new
sustained advance will begin after Thanksgiving.
The fundamental factors for being bullish are also compelling. Low
interest rates are very good for gold. In August, the Federal Reserve
promised to keep rates low for the next two years. Additionally, most
analysts expect the European Central Bank (ECB) to stem the European
debt crisis with a flood of new money.
“The relationship between gold and world liquidity is very direct,”
says Murenbeeld. “If countries print money gold goes up.” Murenbeeld
says there is a high probability that the ECB and the European System of
Financial Supervisors (ESFS) will insert a significant amount of money into the system, anywhere from 1 trillion euros to 2 trillion euros.
“This liquidity will stabilize the banking sector so that it can
withstand a default from Greece and speculation of default from other
countries. All that plays into the hands of gold.” Murenbeeld recommends
investors use a dollar cost averaging strategy here. “When they do the
bailout that will dilute the currency, “ says Barisheff.
“The governments will be forced to print more money because
politically that’s the least painful thing to do. And as they do the
price of gold goes up.”
However, Barisheff warns that it’s easy for governments to lose control of their currency, which can send a country into hyperinflation.
He says gold will stop rising when governments institute sustainable
economic policies, but if inflation isn’t controlled, gold could rise as
high as $10,000 in five years. “And there is no appetite to do anything
sustainable.”
