Gold's Transition Zone…Investor Strategy

The QE program created substantial hedge fund interest in gold-related ETFs.  Unfortunately, QE never created the inflation the funds had anticipated. 

That’s because commercial banks held the QE money they received, “tight to the chest”, rather than loaning it to businesses and consumers.

In a nutshell, by enlarging the money supply while GDP was falling, the Fed created deflation. 

So, if the Fed were to shrink the money supply now, or at least reduce its rate of growth, while GDP rises, and banks start making loans with their “QE booty” at the same time…. is that inflationary?

The answer is yes.

The taper is inflationary, because it stops the wild growth of the money supply, and does so as GDP grows and wages rise.

I’ve labelled 2014 the “year of transition”, from deflation to inflation.  Most gold analysts are sure gold is either forming a base or a consolidation pattern, but neither scenario really fits with market fundamentals.

Sideways price action, for an extended period of time, is what is suggested by the “transition period” fundamentals.

Gold’s price action was a bit soft in recent weeks, but not because Western investors are selling or bearish.  It’s because demand from China and India is not strong enough to overwhelm mine supply and scrap supply.  It’s a case of “close, but no cigar!”

This weekly bars chart shows gold is near buy-side HSR (horizontal support and resistance) that sits around the price of $1240. 

Leveraged traders could buy near that price, with a tight stop loss, and long term accumulators can do the same thing, but without the leverage or the stop loss.

Note the position of the price stoker oscillator.  It’s common for the lead line to reach the 10 area, before an intermediate trend rally occurs.

Giant value-oriented mutual funds can easily overwhelm hedge fund naked selling of gold stocks, with their buying, if they are inclined to buy.  At about $1250, gold is trading in the upper part of the $1000 - $1300 cost of production zone.  Any decline in the price will attract more and more of these value funds, and they will buy with ever-larger size.

A decline under $1180 would undoubtedly be accompanied by hedge fund shorting, but they may find their actions are largely offset by value fund buying, resulting in sideways price action between $1150 - $1350, for quite a long period of time.

The Western gold community is faced with a situation where the West is transitioning, slowly, from deflation to inflation.  At the same time, China and India are transitioning into a “gold jewellery era”, fuelled by the enormous industrialization of their gold-hungry populations.  These transitions take time.  They are not rocket launching bases.  Nor are they trap doors to Hades. 

A long period of sideways price action is dictated by every gold price driver, except for geopolitics. 

Geopolitics is the current black swan that can drive gold higher.  If ISIS is able gain a footing in Pakistan, and attack Indian forces in Kashmir from the Pakistan side, nuclear war is possible,

and arguably likely. 

The disputed border area of Kashmir is probably the most dangerous area in the world, and incidents of gunfire have increased there, in the past few months.  To understand the basic facts about this potential gold price driver, please click here now.

Also, September 11^th is just two days away.  There are rumours of missing passenger planes in Libya that could be used for a terrorist “anniversary” attack.  It’s not something to be obsessed with, but it is a reason to own a core position in gold bullion.

Silver is unlikely to rally before gold does, and it may or may not outperform gold.  The price stoker has declined from about 95 to 16, suggesting that both accumulators and traders should report for buy-side duty! 

I don’t think bullion investors should spend much time trying to figure out whether silver will outperform gold or not.  Ultimately, a bullion investor is drawn to one metal or the other, and it’s really a matter of personal preference. 

If an investor likes more real risk coupled with more potential reward, they should probably be invested in silver.  More conservative bullion investors should focus on gold.  I own both.  Over the past week, I bought more using my “PGEN” (my systematic capital allocator), in some size.

While the past couple of days have been disappointing for gold stock investors, my price stoker oscillator has finally arrived at the 20 area, on this GDX daily bars chart.  I’m a light buyer here in the $24 area, which is also a key Fibonacci retracement line. 

While the outlook for the price of gold stocks is generally sideways, even minor weakness is likely to be bought fairly aggressively, by value-oriented funds, bringing much-needed stability, to the entire precious metals sector!      

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Nobody in the Western gold community is getting any younger.  If gold is set to trade sideways for a year (or longer), rather than look like somebody that just fell off the turnip truck, I want to get paid to wait.  I maintain a separate brokerage account that focuses directly and indirectly on dividend stocks and funds, in the precious metals sector.  Income is important.  I also operate a website dedicated to dividend-focused precious metals enthusiasts.  Personally, I like to get paid every month.  Quite simply, the bird in the hand is often worth many birds in the bush.  I check my account once a week, for the arrival of regular and special dividends.  For details about the website, please send an Email to [email protected].  Thank-you.

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