Gold Is Starting To Look Interesting... - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

Gold Is Starting To Look Interesting…

XAU showing signs of a reversal

Gold, as an asset class, has taken a beating in 2012. Fears of a collapse of the Euro and the potential for a major global slowdown have caused fears of future inflation to change to fears of deflation. Investors typically view gold as a hedge against inflation. The idea is that gold prices will rise during times of inflation, just as they did during the late 1970’s.

While inflation still remains almost non-existent today, gold investors are starting to worry that the actions -specifically stimulus packages – governments take now will lead to a spike in inflation down the road.

Worries that Europe’s problems will spread globally and the fear that China’s economy is also slowing down have sparked the debate of whether Ben Bernanke and the Fed should begin yet another stimulus package. (Current stimulus, Operation Twist is about to end).

One of my favorite charts shows the correlation between Fed actions and the US stock market:

As past Fed programs have ended, the US stock market has reacted negatively. The decline in US equities this past month indicates that this pattern may continue.

Additionally, as I have mentioned before, this is an election year. A weak economy and a weak stock market will cause reelection problems for President Obama. However, as the incumbent, he does have the ability to “nudge” Ben Bernanke into introducing another round of stimulus before the November elections.

I believe the Fed will act sooner than later to prevent any further disruptions to the current recovery. This early action may cause inflation watchers to start worrying that the Fed is doing too much too soon and that their actions may cause a spike in inflation rates.

This is getting gold investors excited. As a result, gold looks to be on the rebound. The sector recovered after touching a key technical level and looks to be racing towards its 200 day moving average (SMA).

Gold bounces after hitting long term support levels.

While investors will have to wait to see what (and when) the Fed does, gold watchers are starting to anticipate another round of stimulus. In addition, China, in a surprise move, lowered interest rates to help stimulate borrowing – hopefully to spur continued expansion of their economy.

A combination of European worries and the need to provide additional liquidity to match and participate in China’s expansion (more US liquidity helps US companies get loans to expand into China) should give the Fed the excuse they need to introduce another round of easing sooner than later.

 

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Disclaimer: I and/or my clients have a position in gold and gold mining ETF’s and may add further positions in the future.

 

 

 

 

 

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