Gold seemed to be the trade of the decade a year ago. Prices were soaring to new highs, and it didn’t look like there was any sign of resistance in sight. That all ended on Sept. 6, 2011, when gold hit its peak at $1,923.70 per ounce. Since that time, gold has been pulling back and consolidating to support just above $1,500 … that is, until now.
If you missed out on the first gold rush, get your prospecting gear ready, because the second gold rush just kicked off.
Why do we say this? Because both the fundamental drivers of gold prices and the price chart for gold are confirming it.
Let’s start by taking a look at the following five fundamental factors we outline in our book All About Investing in Gold (McGraw-Hill, 2011):
- Fear of inflation
- Currency fluctuations
- Global risk discounting
- Interest rates
- Supply of and demand for gold
The first two factors — fear of inflation and currency fluctuations — are both being driven in large part by the Federal Reserve and the looming threat of more quantitative easing. If the market believes the Federal Open Market Committee is going to pull the trigger on QE3, investors will start buying up gold to protect themselves. The fear is that additional easing will not only flood the economy with excess liquidity — which could lead to uncontrollable inflation down the road — but also continue to devalue the U.S. dollar. When inflation takes off during periods of weak economic growth and the value of the U.S. dollar declines, gold prices tend to shoot higher.
The third factor, global risk discounting, continues to be brought back into the spotlight every time anyone mentions Greece leaving the eurozone. Nobody knows just how far-reaching the negative effects a Greek departure from the common currency could reach, but investors are pretty sure those effects won’t reach into their secure stash of the oldest form of wealth preservation still in use today: gold.
The fourth factor, interest rates, continues to force investors to look for a better return on their money as rates are at record-low levels. You don’t have to look far to see record-low levels on U.S. Treasury yields, negative yields on both U.S. Treasury Inflation Protection Securities and various European sovereign bonds — thank you, Denmark and others — and savings accounts that offer no hope of any significant returns.
Lastly, the fifth factor, the demand for gold, is about to pick up as we enter the festival season in India and approach Christmas — a time when consumers pick up the pace of their physical gold purchases in the form of jewelry and other gifts. We’re also seeing a continuation of a move by central banks around the world to diversify their holdings by buying gold and other assets.
Click to Enlarge With all five fundamental factors lining up at once, it is no surprise we just saw the price of gold confirm a breakout from a bullish continuation pattern — a bullish wedge, to be precise — on its longer-term chart.
That’s a textbook breakout to the upside on a bullish wedge.
Click to Enlarge However, if you want a little closer look, all you have to do is zoom in a little bit, and you’ll see that the resistance level that had formed at approximately $1,625 per ounce has clearly been shattered.
If you want to get in early and stake your claim in this new trade, now is the time to do it. The second gold rush is starting. And if it’s anywhere near as good as the first gold rush of this century was, we’re in for quite a ride.
Of course, most traders don’t have the storage space or the bankroll to load up on the metal itself, but if you’re looking for a way to play this upcoming move, take a look at the SPDR Gold Trust (NYSE:GLD).
GLD is the world’s largest exchange-traded fund and provides a stable, liquid way to trade gold — complete with all of the benefits of trading a stock — like stop-losses, options and so on. We’re still determining exactly how GLD might fit in our portfolio, but if we take action, we’ll likely recommend that our SlingShot Traders use the upside leverage that call options provide.
S. Wade Hansen and John Jagerson are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.