Courtesy of John Nyaradi
While global stock markets struggle with deteriorating economic news and sagging technical indicators, one asset class has been in a streaking uptrend and that is gold.
Variously viewed as “the barbarous relic” or the new world currency, gold is captivating investors’ attention as it has for thousands of years. And it’s easy to understand the interest as gold has gained more than $330/oz since July and is up more than 20% year to date.
Chart courtesy of StockCharts.com.
Above is a chart of iShares Gold Trust (IAU) and you can clearly see how it has been in a steady uptrend, some would say a bubble, for the most part of this year. iShares Gold Trust (IAU) offers ETF investors a liquid and easy way to hold a position in the gold market within a conventional investment portfolio. Founded in January, 2005, iShares Gold Trust is designed to replicate the daily movement of the price of gold bullion and currently has more than $8 Billion in assets under management.
Gold bugs say that gold has far to run and could reach $5,000 or more in response to either runaway inflation or global financial collapse while doubters argue that it’s a bubble about to pop like all bubbles eventually do.
Fans of gold say that it can only go higher. They say this because if inflation is the result of current monetary policies then the dollar will decline while gold will skyrocket and if financial collapse is the eventual outcome of today’s policy, then gold will be the currency of last resort and so will also soar in value. Certainly hyperinflation is one possible outcome of the several years of easy money that we’ve seen and the projected years ahead of zero interest rates and central bank intervention around the world.
With the Federal Reserve possibly poised to resume “quantitative easing” and global jitters everywhere you look, gold advocates say the yellow metal can only go higher.
Furthermore, demand for gold is still strong worldwide as not only retail investors but central governments buy gold, including big players like Russia and China. Central banks buy gold in the tons, and emerging world countries like South Korea, Mexico and India have recently joined in the fray. Central banks around the world bought nearly 70 metric tons in Q2 alone and in the fist half of 2011 have bought 2.5 times as much gold as they did in the first half of 2010, becoming net buyers of the precious metal for the first time in 20 years.
Many analysts say that any dip in prices should be viewed as a buying opportunity and JP Morgan recently forecast $2500/oz. by the end of this year.
So Is This the Time to Get In?
Many people are asking themselves this question, both people who have missed the run so far and those who are thinking about adding more money to current positions.
Looking at the above chart, gold is clearly in a strong uptrend; however, the RSI in the top display indicates extreme overbought levels of “80” and this reading would indicate the likelihood of an impending correction.
What fundamental factors could cause such a correction? Anything that would strengthen the U.S. dollar would certainly be a factor, like a meaningful deficit reduction agreement by the “super committee” in Congress, or slowing growth in China could impact demand for gold, as well.
In summary, commodity markets, gold included, tend to go on years long trends, either up or down. Expect volatility and the tides here can turn quickly; however, since this uptrend in gold took off in earnest in 2005, it could still have many years left to run. If JP Morgan is correct, there’s still 40% upside over the next four months alone.
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