Wednesday, March 14, 2012

Gold

Gold has been taking quite a beating for the past two days and I stated in yesterday's blog that I was rethinking my thesis on the yellow metal:

(click on chart for larger view)

Depending on what expert you listen to, the twelve year bull market in precious metals has been the result of inflationary pressures in the global economy, a growing distrust of fiat money (especially with the onset of quantitative easing), a flight to safety trade (Armageddon scenario), or a combination of all three.

I believe that there's some truth to all the reasons listed above although I disagree that there is any meaningful inflation in the global economy.  Any inflation we have seen is transitory in nature and largely because of the devaluation of the US Dollar. 

But news events of the past few weeks has undercut all three reasons.  The Euro zone crisis may not be over but a huge band aid has has been applied to it and it is no longer a market mover.  And with the band aid an Armageddon scenario is now off the table.  As the Dollar strengthens inflationary pressures subside.  And Bernanke's recent statements make it clear that while QE has not been totally discounted as a future option, with the recent positive US economic reports it is obvious that the FED will not be "stimulating" the economy any more than it has for now.  Therefore, there is no good reason to own Gold.  And with interest rates rising, there is yet another reason to sell a non interest bearing asset to purchase yield.


As to the chart above, momentum is horrible (white arrows) and it appears we will test the December lows at around $1,525.00.  Gold closed today at $1,644.80.

Unless you believe that the world is in imminent danger of falling apart in some kind of "black swan" event, I'd be looking to lighten up my holdings in Gold on the next bounce higher.  We should get at least a "dead cat" bounce or hopefully a decent relief rally up to the $1,725.00 level?  (hopefully).