Every few months, I like to canvass my gold contacts at the retail and wholesale levels, such as Asset Strategies International, to see what the consumer mindset is for gold and precious metals.
Retail buyers are a crucial component when measuring sentiment both on the upside and downside. It’s a good indicator of where gold prices may go.
But now that we’ve been in a sustained gold bear market for several years, retail buyers have unsurprisingly switched from being optimists to pessimists.
[ad#Google Adsense 336×280-IA]In short, those who are selling gold are doing so because they need to or because they’ve lost faith in their investment.
Meanwhile, the buyers are waiting for a price breakout to buy… which won’t occur unless they start buying!
This paradox is making investing in gold as brilliantly simple as it gets…
Ripples From U.S. Dollar Drop
In the current conundrum, being patient with your assets is the only thing to do.
You see, when the price of gold is moving higher, retail buyers will inevitably hop aboard the train late and provide the momentum needed to propel prices to extraordinary levels.
We saw this happen in the last rally when prices spiked from $700 to close to $2,000 per ounce in a short period of time (in terms of gold price history).
Instead, the big gorilla in the gold market is the U.S. Federal Reserve. That’s because, in the short term, gold is all about liquidity, inflation expectations, the U.S. dollar, and interest rates.
Obviously, the Fed and statements from Chairwoman Janet Yellen play a key part in three of those four factors.
Liquidity is always an issue with gold prices. There just isn’t that much gold out there. For the most part, any level of sustained buying or selling will affect prices.
Gold moves in dollars and sometimes tens of dollars per day. It’s a rare resource and commodity that can’t just be produced out of thin air, nor can production miraculously be ramped up overnight like in the oil and gas market. New mines require years of approvals and are hugely capital intensive. Some projects require billions of dollars compared to a few million for drilling and completing a shale oil well.
That means when there’s pressure, particularly on the buy side, gold can move sharply higher.
Inflation expectations are a double-edged sword in the short term, but very positive for gold in the longer term.
In the short term, raised expectations lead to tighter monetary policy, which can increase the value of the underlying currency and offer an alternative to monies seeking yield – something that holding gold doesn’t offer. But, over time, inflation erodes the purchasing power. This benefits those holding gold who would normally enjoy an increased price for their “hard asset” holdings.
Interest rates staying low are a boon for gold prices, if they remain low…
With interest rates trending lower in many global markets, the underlying currency weakens and the price of gold, which is traded in U.S. dollars, strengthens.
That’s why gold is in a bull market in yen and euros, yet flat to slightly up in terms of dollars. Higher rates in the United States will be positive for the U.S. dollar in the short term and negative for gold prices in U.S. dollars.
Carefully Sifting Through Opportunities
The U.S. dollar is king right now, and that’s bad news for commodities prices all around, as most are priced and traded in dollars.
It would take a significant and unpredictable non-dollar related event to move prices higher. But, one holds gold and precious metals because unpredictable things do happen. And when the unpredictable happens, gold becomes a safe haven, despite the strength of the dollar.
Gold has been able to hold its triple bottom around the $1,150 level for quite some time. That indicates there’s accumulation at current levels.
Whether a breakout is imminent is less sure, and would be more likely tied to the strength of the U.S. dollar, for now.
But, that doesn’t mean there aren’t opportunities in what’s likely the most-hated sector in the market today, other than oil and gas stocks…
Gold and precious metals companies are trading at bear market levels and may present an excellent opportunity for those who have the patience and foresight to buy today.
And the chase continues,
Karim Rahemtulla
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Source: Wall Street Daily