After spending the last four months sliding lower, precious metals are attracting investors interest once more. That’s a big deal since between November and January gold prices formed a “triple-top” pattern after repeatedly being pushed back from resistance near $1,430 an ounce. That, says the chartists, pointed to certain doom for the yellow metal.
But with political unrest spewing forth in Egypt and Tunisia, inflationary pressures on the rise, and with renewed concerns about the viability of the U.S. government’s tenable fiscal positions and the economic penalty we’ll all pay to solve it, precious metals and the stocks of the companies that pull them out of the earth are pushing higher.
Over the last two weeks, gold futures are up more than 3.5%, silver futures are up nearly 9.7%, the Market Vectors Gold Miners ETF (NYSE: GDX) is up 7.7%, and the Global X Silver Miners ETF (NYSE: SIL) is up a whopping 15.8%. Can the gains continue?
The first thing you need to know is that while precious metals have demand fundamentals driven by jewelry and industrial uses, the big swing factor is investment demand — especially via easy to trade ETFs like the Gold SPDR (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV). These flows started to abate last October.
You can see this in the chart above, which compares the amount of investor cash in the GLD vs. the ETF’s trading price. Early last year as the eurozone debt crisis went nuclear and economists started to worry about a double-dip recession, investors moved into the GLD and other precious metals investments for safety. Over the last few months, these flows have reversed as investors sought out riskier assets — including industrial commodities like copper and energy stocks — on signs the economy was improving again.
But now, with small cap stocks moving lower, emerging market equities on the slide, and the CBOE Volatility Index (VIX) moving higher as Wall Street insiders fret over potential stock market losses, gold prices are rebounding. I expect this to be reflected in a rebound in GLD assets in the weeks to come as the data is released.
All of this is happening right on schedule according to the cycle work of Tom McClellan of the McClellan Market Report. We’re nearing an important 13-1/2 month cycle low for gold. Although these cycles aren’t exact, they seem to be able to call the big turns in precious metals. The last 12-1/2 month low arrived a month late in February 2010 just before the Greek debt crisis caused safe haven assets like gold and the U.S. dollar to surge.
With investor sentiment so high, the subject of my column last week, I think we’re poised for another surge in gold as the market gods restore a sense of fear into the hearts of complacent and overconfident investors.
I don’t know what the catalyst will be — maybe Portugal will be forced into the arms of an EU-IMF bailout as its borrowing costs continue to flirt with crisis level highs. But for now, I’m recommending my newsletter clients increase their exposure to gold and gold stocks like Allied Nevada Gold Corp. (AMEX: ANV) — which gained nearly 4% today.
Disclosure: Anthony has recommended ANV and SIL to his newsletter subscribers.
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