Gold Continues to March Higher Despite Positive Speculative Lean

Gold Continues to March Higher Despite Positive Speculative Lean

Fundamental Forecast for Gold: Neutral

• A sharp drop in speculative markets rouses gold’s safe haven status
• Gold marches towards a fresh record high; but will the commodity make it to this milestone?

Despite the volatility in other asset classes and the backdrop for investor confidence itself, gold has maintained a steady bearing: up. The precious metal has carved a consistent yet somewhat gradual rising trend channel since forming a ‘V’-bottom back in the end of July. Such stability is rare in speculative markets and is typically evidence of a lasting move. At the same time, consistency is an aberration of a free market; and the longer it lasts, the more likely it is to end. What we need to determine going forward is whether this steady advance is the work of a systemic transfer of capital or a temporary bias in speculative interests. If investors are simply buying gold as a hedge to inflation, capital losses, a possible financial crisis or any other number of threats, the run will soon come to an end.

It is easy to simply label this precious metal as a foil to the capital return assets; but that would be ignoring its true appeal. To banish such a simple connection, all we need to do is compare this past week’s climb for the precious metal to the strong, four-day rally for equities. Instead, gold is bid up because it is considered an alternative to traditional investments and safe havens when the markets suffer shocks. That being said, the threat of a crisis seems – on the surface at least – to have dissipated. Yet, if we look to the long-term developments behind the markets and economy the real currents are more obvious. First off, the global economy has shown definitive signs of cooling. If not an early downshift in quarter GDP numbers (from the US and Japan for example), we see the cooling in more timely indicators. Furthermore the expansion of stimulus programs further depreciates assets based in fiat currencies; and rather than supporting speculative activity like it did back in 2009, it smacks of desperation as it becomes clear that the first round failed. On this point, we will watch the reaction to the announcement of new economic stimulus proposals from US President Barack Obama next week. While not quantitative easing, it is in a similar vein.

For specific, calendar-bound catalysts, there are few events that can be reasonably expected to jump start market-wide sentiment and therefore gold. From a series of central bank decisions (BoC, RBA, BoJ and BoE), only the Bank of Canada is expected to actually change its primary lending rate and only the Bank of Japan has a slim chance of altering its bearings on unorthodox policy efforts. Other than that, the Eurozone’s investor sentiment indicator could be interesting to determining the market’s willingness to support a still strained European banking and government debt system. And, perhaps the Fed’s Beige Book can move the needle on economic convictions.

From this collective event risk, we can see that the speculative element is still highly volatile; and we cannot classify a true seismic shift in capital to support gold’s steady advance as a safe haven. Fear of inflation and/or market collapse is an outlier scenario even now. And, if we see speculative interests pick up (the SPDR Gold Shares ETF is a good gauge of this and its volume has been exceptionally low these past few months); we could see fundamental push that perma-bulls cannot hold their ground against. - JK