Gold: Are Greed And Fear Becoming Irrelevant?

Almost every day, bank economists are making more positive statements about the outlook for gold prices, and rightly so.  "Money printing had almost always resulted in inflation but in today's excess global production capacity environment and with the oil price having collapsed, that inflation has been deferred…." - Jon Bergtheil, Citigroup, April 13, 2015. 

Jon suggests that the 2016 – 2020 period should support higher gold prices, because the inflation that has been deferred will arise.

Barron’s also posted a very positive report on Newmont on the weekend, stating that Newmont shares will rise substantially, even if gold declines. 

I agree, and in 2014 I predicted that 2015 -2016 would see many gold stocks outperform gold, regardless of where gold trades.

Merrill Lynch analysts predict gold could rise to $1500 by 2017.  They are joined by economists at ANZ bank and HSBC.  The list of bank analysts that are warming up to gold is getting larger all the time!

I think it’s important for investors in the Western gold community to give careful thought to these very rational statements made about gold and gold stocks, by top bank economists. 

That’s because the love trade in China and India has experienced astronomical growth in the past several years, as signs of wage price inflation in America are appearing. 

These two events are highly supportive for gold prices.  With all due respect, most of the amateur analysts still regularly drawing arrows to Pluto or Hades on their gold charts may need to take a large “chill pill”.  Here’s one reason why: The current issue of Barron’s quotes JP Morgan fund manager Bob Michele stating, “Although some past hiking cycles have proved disruptive (1994 is a case in point), others, like 2004-2006, are more muted and manageable. We think the coming cycle will fall in that second camp. The Fed will be cautious—that is key.” 

When the fundamentals of the US economy and the statements of Janet Yellen are weighed rationally, it’s clear that the Fed intends to raise rates, but not until there is more evidence of wage inflation, which is itself very supportive for gold.

In regards to US interest rates, gold responds more to changes in long term T-bond rates than to short term rates, and the Fed seems focused mainly on the rates of short term bonds.

My suggestion to the Western gold community is to adopt an “eager” mindset about gold; modest price declines should be bought aggressively, but modest rallies can also be sold aggressively, because the fundamentals suggest gold will continue to trade roughly sideways, with a growing upwards bias.

That’s the daily gold chart.  It’s clear that minor price declines are less worrisome than a fly to most bank economists now, and I think it’s time for the entire Western gold community to adopt that mindset. 

It’s the greatest time in history to own gold, with inflation creeping higher in America, and the love trade growing like a tidal wave in Dubai, China, and India. 

I’ve been a seller of some gold around $1217, and a buyer at $1185, with a smile!

When the price fell in 2013, many amateur analysts rushed to say, “Gold is an insurance policy, so you shouldn’t have more than 1% - 5% of your net worth in it”.  Gold isn’t just an insurance policy.  It’s the greatest asset in the world, and investors can invest large amounts of their net worth in it.

It’s the outrageous expectations of obscene profits and fears of price collapse that cause problems for investors in gold, not the asset itself.  Gold should only be bought in size at major HSR zones (horizontal support and resistance), and the focus now should be gold stocks more than gold.

That’s the daily chart for Newcrest, one of the world’s top gold producers.

The chart looks superb, and so do the charts of many gold stocks.  That’s the daily chart of AuRico, which is a GDX component. The stock is gapping higher on awesome merger news: 

“Miners Alamos Gold Inc. and AuRico Gold Inc. said Monday they have agreed to merge, creating a gold producer with a combined market capitalization of around $1.5 billion and key producing projects in mining-friendly jurisdictions in Canada and Mexico.” – Wall Street Journal, April 13, 2015.

Many gold stocks have staged spectacular rallies in 2015, and held their gains, but that’s not reflected in the GDX and GDXJ ETFs because other component stocks have languished.  As the love trade intensifies and US wage inflation becomes widely recognized, top bank analysts will inspire mainstream money managers to buy more gold stocks. The ETFs will begin to stage bigger rallies as that happens, and hold the gains.

That’s the GDX daily chart.  It looks like a “wet noodle”.  My suggestion is to approach it, as with gold, somewhat aggressively on the buy side on small declines, and almost as aggressively on small rallies.  The tactics used should reflect a sideways market that has a mild and growing upwards bias.

That’s the daily chart for silver.  The main point I want to make here is not that silver could decline to a new low, but that it is tremendously well supported by love trade and wage inflation fundamentals, and it tends to track gold. 

So, minor weakness needs to be bought aggressively and without fear, and minor strength can be sold without fear that the price is “getting away”. 

The tactical reality for silver is not that it is about to rocket higher or crash, but that the asset has never been as fundamentally solid as it is now.  Greed and fear in the Western gold community will go the way of the dodo bird, as investors see more and more top bank economists and fund managers embrace gold, silver, and mining stocks…. as assets of quality.

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