Positioning for a Turnaround in Gold Markets

Some of the biggest moves in the financial markets so far this year have been seen in the precious metals space, with gold prices falling roughly 26% year-to-date and the silver now trading below the $20 mark. From a long-term perspective, these moves have been highly significant as we are now on pace to see the first yearly declines in gold in 12 years. But while this might be troublesome for those already invested in precious metals, the recent bearish moves offer some interesting buying opportunities that have not been seen in years. In fact, gold prices have already made a sharp rebound after hitting the lows seen in June. This was when the yellow metal was trading at $1,180 per ounce. Prices have now risen 5.6% since that period and it is starting to become more apparent that the precious metals market is likely to get back into its longer term bullish trends.

Factors at Work: the US Dollar

So, at this stage it makes sense to look at some of the potential factors that could put gold prices back in line with its longer term trends. This type of assessment is vital in order to determine whether or not now is the right time to start investing in gold once again. First, it is important to consider economic activity as it relates to the US Dollar. Since gold is priced in Dollars, there is an inverse correlation between these two assets. That is to say, when the US Dollar drops, gold usually sees significant gains. And when we look at recent statements from the US Federal Reserve, we can see clear indications that “tapering” in quantitative easing stimulus programs is likely to continue for the foreseeable future.

The Fed has made it clear that the US economy will require stimulus programs in their current forms until the national unemployment rate drops to 6.5%. Since we are still well above that figure, there is little reason to expect that the Fed will be making any major changes any time soon. This is going to continue creating a bearish environment for the US Dollar because the Fed will continue pumping money into the US economy at a rate of $85 billion per month, for the foreseeable future. Simple supply and demand economics teaches us that if supply is increased and demand stays constant, valuations will begin to fall. This law of economics holds true for the US Dollar as well, and this means that the value of gold is likely to rise on a relative basis.

Increased Demand in Emerging Markets

Another factor to consider is the strongly rising demand in emerging markets. In September, Chinese demand for gold in the form of bars, coins, and jewelry rose by 30% to nearly 1,000 tons. This means that China is likely to overtake India as the world’s largest importer of gold and this creates another bullish environment for the price of precious metals. As long as global demand is being supported by economies and populations as large as India and China, there is little reason to believe that the price of gold will see significant declines from their current positions.

“The rallies in gold seen since June have been impressive,” said Tony Davis of Atlanta Gold & Coin Buyers , “and this creates an encouraging environment for those looking to gain protective exposure in precious metals as we head into next year.” To be sure, the collection of supportive elements have been largely verified by rallies in the gold price itself, and this means that those looking to get back into gold markets now will be buying in at a discount relative to where we have seen prices go in the last five years.

It should be remembered that the all-time high in gold is far above where prices are seen currently. Spot gold markets are currently trading in the neighborhood of $1,240 per ounce, which is nearly $700 Dollars below the all-time highs of $1,923. To gain some perspective, if an investor bought gold at current levels, and prices re-tested their all-time highs, that investor would stand to accrue gains of more than 55%. So, given the supportive macroeconomic environment that is currently in place, it makes sense to look at gold as a protective way of diversifying your portfolio, hedging against inflation, safeguarding against any declines seen in the US Dollar. The declines seen this year have been uncommon when we look at the last decade, and we could easily be in a position now where the longer-term uptrend starts to reassert itself.

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