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I recently published a column for Uncommon Wisdom Daily titled 3 Gold Charts You Need to See. In it, I showed you why: A) miners were really cheap on a price-to-earnings basis; B) miners were undervalued compared to the metals; and C) we were coming up to what should be a good time of year for gold.
Despite the recent volatility in gold, all those things remain true. In fact, here are five more forces that are bullish for gold:
Force #1: Gold Is Near the Bottom of a Cycle
Looking at this chart of the SPDR Gold Trust (GLD), which holds physical gold, you can see how gold bottomed on July 27, 2010, and then again 6 months later.
It’s now six months after the last bottom, and we could be set up for another one. The previous bottoms have coincided with gold and the GLD touching their 150-day moving averages.
I don’t know if we’ll get that this time. In any case, if history is a guide, we could be coming up on a great buying opportunity.
What I would use as an indicator is MACD on the bottom of the chart. When it signals “buy” it will be time to load up.
Force #2: History Says the Next Move Could Be Big!
How much could gold go up? Last year, gold rose more than 22% from July 27 to December 6, when it started a speedy decline that took it into another low in January.
To be sure, looking at the chart I gave you in force #1, gold could decline before it blasts off. So let’s say it pulls back to $1,400. A 22% move higher from there is $1,708.
It doesn’t have to be that big. Gold’s recent surge from January to April was only a 15% move. But it could also be bigger.
Other forecasters are already ratcheting up their gold targets. Erste Group’s Ronald Stoeferle recently issued a report titled In Gold We Trust in which he laid out a case for gold to surge to $2,300.
Force #3: The Market Is Expecting a Seasonal Bounce
‘Tis the season to invest in gold. Thackray’s 2011 Investor’s Guide says that the optimal period to own gold bullion is from July 12 to October 9 and the optimal time to own gold equities is from July 27 to September 25.
And the surge that we see in the metals extends to gold miners. In fact, the average return per period for the gold equity sector during the past 25 years was 6.8%, according to Thackray.
Psychology is a huge part of the market. If investors expect gold miners to move higher, they’ll put money to work, and it becomes a self-fulfilling prophecy.
Speaking of which, last week, gold mining stocks ended this most recent week UP (as measured by the $HUI and GDX) while gold ended the week DOWN. This disconnect tells us that the market may be realizing just how undervalued gold miners are.
Force #4: Central Banks Plan to Add to Gold Hoards
We know that central banks have been adding to their gold holdings. And indications are the trend is only going to accelerate.
First, what we know: Central bank gold reserves rose by more than 2% between 2008 and the end of 2010, with central banks in Brazil, Russia, India and China — as well as those in the Middle East — particularly strong buyers of the yellow metal, according to data from QNB Capital.
Most recently, in the first quarter of this year, the Mexican central bank purchased 100 metric tonnes of the yellow metal.
This is a big turn-around from the trend in place in the previous decade, when central banks were steady and reliable sellers of gold.
Now, according to U.S. Global Investors, a survey of 80 central bank reserve managers predicted that the most significant change in their reserves over the next 10 years is they plan to buy more gold.
What’s more, over the next year the respondents forecasted that gold will be the best-performing asset class, citing sovereign debt defaults as the principal risk to the global economic landscape.
Force #5: South African Production Continues to Decline
South Africa’s gold output during the first quarter fell 9.3% compared to the fourth quarter of 2010. The Chamber of Mines also revised total gold production for 2010 to down to 6,751,506 ounces from the 6,766,709 ounces published earlier.
Remember, this is happening at a time when gold is over $1,400 an ounce. The fall in South African production is not because gold is too cheap.
One reason could be rising costs. According to Barron’s, in the first quarter of 2011, the average all-in cost for gold miners rose 19% from the previous year to $1,081 an ounce. Rising costs should boost prices by squeezing marginally profitable producers.
How You Can Play This
Gold and gold miners could probably get cheaper. Gold has strong support at $1,442 and $1,393. And that would be a heck of a buying opportunity. If we do get a pullback, consider adding to your physical gold, and you can always add the iShares Gold ETF (IAU) or SPDR Gold Shares (GLD) for a trade.
In any case, I plan on adding to my own physical gold holdings when the MACD indicator on that chart I showed you gives a buy signal. It’s probably the best buying opportunity we’re going to see for quite some time.
As for stocks, many of the best of them are tracked by the Market Vectors Gold Miners ETF (GDX).
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