Along with the recent firming in gold prices, the relative strength of gold stocks has caught investors attention despite negative analyst reports coming from the usual suspects, Morgan Stanley and Goldman Sachs.
Wall Street appears determined to keep investors putting money into the broader equity market rather than gold for reasons that are becoming all too obvious. Some day this game will come to an abrupt halt and the “Muppets” – as they were once called famously by various managing directors at Goldman – will be left holding the proverbial bag – again. Given the tendency in recent times for markets to swing violently in both directions, the next major sell-off could be truly historic.
It’s been a rough week so far for the gold bears with the Junior Gold Miners (GDXJ) pushing through resistance on good volume. Some of the long suffering junior miners (including Timmins Gold) have even gone into the market to refinance their debt obligations and future production plans. There’s also been some M&A activity with Goldcorp making a hostile bid for Canadian gold miner, Osisko. Interestingly, a lot of junior gold miners are trading like they’re takeover candidates, among them heavily shorted McEwen Mining which has been on a real tear lately although it fell a bit today.
What is the real inflated value of gold today? That’s an interesting question for people who think the metal’s upside is limited. Phoenix Capital Research has done an analysis that shows during the last bull market in gold, the precious metal rose 2,329% from a low of $35 in 1970 to a high of $850 in 1980. Phoenix does note, however, that for 18 months during that period gold fell nearly 50%. That might provide some solace to gold investors who saw the yellow metal plunge by around 25% last year alone. The chart below is interesting as it shows two bull markets for gold from 1970-1980. Could this be an analogue for what we are seeing in the gold market today: a painful interruption in the gold bull market and a continuation to higher levels thereafter?
Gold has a number of key drivers that could move it much higher in 2014. Among the strongest is Chinese demand which is set to rise with the Chinese New Year celebrations.
Last year, the Shanghai Gold Exchange, China’s biggest spot bullion market, delivered 2,197 tonnes to customers, compared with 1,139 tonnes in 2012. Press reports suggest that China will soon announce its gold reserves which – if market speculation is correct – could have doubled from last year. An increase of that nature would certainly help underpin gold prices in 2014.
Exchange-Traded Funds saw their holdings fall by 33% by the end of 2013 but they are starting to buy again. Barclays says that Exchange Traded Products accumulated 7.4 metric tonnes on Friday, the largest daily inflow of gold into ETPs since November 2012 when gold was trading at $1700 per ounce.
Later this month, the market will get a better indication of the Federal Reserve’s intention to begin tapering its bond purchases. The odds aren’t high but should the Fed decide to delay the taper, or provide some indication of its reluctance to taper further, the reaction in the gold market could be explosive.