Gold prices have had a nasty few years, as have major gold miners and mining stocks. Gold bullion prices are down significantly from highs around $1,900 an ounce… and even worse, gold investments including Newmont (NEM), Barrick Gold (ABX) and GoldCorp (GG) are all down over 50% in the last three years.
But there are signals that the worst may now be over, and it may be a good sign to start buying gold once more.
Since January, gold has crept up steadily; the SPDR Gold Trust (GLD), which tracks physical gold prices, is sitting on a roughly 10% gain – nearly double the return of the S&P 500 in the same period.
For the record, I am no Peter Schiff here with delusions of gold hitting $5,000 as the stock market implodes and inflation runs wild. But I think it’s undeniable that the short term trends are decidedly higher for gold mining stocks and gold bullion prices.
Gold Haters are Plentiful
It was easy to be bearish on gold in 2013 as equities soared and commodity prices were held back. But the sell-off has already been had, and now the negativity is firmly priced in.
Sure, late last year, renowned commodities trader Jim Rogers warned gold prices could fall to as low as $900 an ounce before it truly bottoms. And just a few months ago Goldman Sachs (GS) warned gold’s rally was a head fake and the precious metal would finish the year at $1,050.
But these calls have been proven wrong so far – and are proof that the stubborn bears may have gotten a bit too negative, and now the pendulum is swinging the other way.
Remember, price targets mean nothing. For instance, at the beginning of 2013, the “smart money” at Goldman initially predicted a $1,600 target on gold prices by year’s end, which it kept revising lower and lower over time, as it became clear how wrong that prediction was.
As the saying goes, the time to buy is when blood is in the streets — and after a beating like this and such derision for investors, it is hard to imagine how the sentiment on gold could get much worse.
Act now before the tide turns and everyone starts to get overly bullish… which could mean the largest part of the rally is already behind us.
Gold Charts Look Good
Behind the scenes, technical analysts are starting to point to the potential of a swing in gold prices. Charts over the past few months have shown a “double bottom ” in gold, and hint at bullish consolidation right now as a pause before another leg up towards $1,400.
Sure, the relief rally of the past few months could be a fake-out. But if you’re a swing trader looking for a contrarian call, don’t overlook the potential of gold right now based on the charts and sentiment alone.
Because if we see just a little more strength in the precious metal, we could see a virtuous cycle of buying pressure that builds momentum considerably across the summer months.
Iraq, Russia and a “Risk Premium”
A wild card that could continue to lift gold is the unfortunate persistence of unrest in many corners of the globe.
Pro-Russia separatists continue to clash violently with Ukrainian forces, and ISIS continues to wreak havoc in Iraq. But the headlines continue far beyond these regions. Syria is still a hot mess more than three years after the Arab Spring uprisings of 2011, and Thailand is dealing with the fallout of a recent military coup as just two examples.
This kind of environment, when many developing nations have unstable governments as Western nations are grappling with how best to avoid the damage, is when gold tends to shine best as a “safe haven” investment.
The traditional argument for gold is that it’s a “store of value” and a hedge against inflation. That argument hasn’t been very attractive in recent years, with a rate of inflation that has been historically quite low.
However, the May consumer price index reading showed a 2.1% increase in prices — sparking renewed interest in inflation, and the investments that traders can use to fight this trend.
Interestingly, the inflation hedge status of gold has really worked against it as wages and prices have stayed put. But now, as things change, gold seems to be returning to favor.
Of course, you don’t have to buy gold; you can always buy bonds, emerging market stocks or equities in developed markets.
But frankly, none of those options seems very appealing.
Bonds have anemic rates, and there is a very real threat of interest rate risk for long-term bond funds as the Fed looks to tighten policy in the next year or so.
Emerging markets remain volatile and risky, with chronic underperformance in recent years.
And as for U.S. equity… well, the most untrusted rally in history continues but many investors are leery of buying a top with valuations stretched and earnings looking weak.
Sure, stocks could continue to set new highs and push the S&P 500 to another impressive gain this year. And sure, there’s no guarantee that gold will go up.
But given the sentiment setup and the lack of alternative, I wouldn’t dismiss gold investment out of hand this summer.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via@JeffReevesIP.