by Tom Power
Gold continues to move higher, reaching another record high above $1,900 an ounce Tuesday, September 6, after the Labor Day holiday break. In the past four months, gold has rallied more than $450 an ounce. While many investors and traders are reluctant to jump in and purchase gold at these levels, I believe the market has still has bullish momentum and fundamentals on its side and pullbacks represent favorable buying opportunities.
European Woes
Why? First, let’s look at Europe. European markets remain weak on continued concerns over the Eurozone debt crisis. Europe’s worsening debt has prompted governments to deepen budget cuts, and investor confidence has dropped to its lowest level in more than two years. New concerns are being raised about Italy after Italian bond yields climbed for 11 days in a row and the cost of insuring government debt also jumped to record highs. In response, Italy announced a stronger austerity budgetwith a higher value-added tax and a constitutional amendment to balance its budget.
In July, the European Union (EU) had promised more bailout money for Greece and other nations with massive debt, but since then, the situation has deteriorated. Greece may not be able to meet fiscal targets set out by the EU, IMF and the European Central Bank. Investors seem worried the euro currency might not survive in its current form.
Meanwhile, in a surprise move, the Swiss National Banksaid it would peg its currency (continued an investor safe-haven) to the euro, which some analysts say could boost gold even higher given the concerns about the euro’s future.
This is a critical period for Europe, and the threat of some sort of break-up between now and year-end has heightened. As a result of uncertainly and fear, investors have been pulling out of stocks, the euro, and other assets perceived as risky in favor of “so-called” safe-havens such as U.S. Treasury bonds and notes, the U.S. dollar, the yen and of course, gold.
U.S. Dollar
You can certainly make an argument for the dollar as a safe haven vs, the euro. Gold and the dollar have historically had an inverse relationship. As gold is priced in dollars, strength in the dollar would typically mean weakening in gold. However, I think the tide has turned in that regard and any short-term support for the dollar will provide good buying opportunities in precious metals.
The weak August U.S. employment report signaled that the U.S. economy is at a standstill. There were no new non-farm payroll jobs created, and unemployment is stalled at 9.1 percent. The report triggered fears the economy will slip into another recession, requiring another round of stimulus from the Federal Reserve. That would likely limit the upside in the dollar.
Nations Boost Gold Reserves
Countries around the world are recognizing the value of gold. Venezuela recently nationalized their reserves and has relocated more than $6 billion in cash reserves from accounts in Britain and Switzerland to China, Brazil and Russia. More than 200 tons of gold are being recalled. China seems increasingly nervous about the debasement of its $3 trillion of U.S. debt. From 2003 – 2008, China has more than doubled its gold reserves to become the largest holder of gold reservesin the world (not counting the IMF).
In 2010, a researcher at China’s Chamber of Commercesuggested that China will eventually boost its gold reserves to a level equal to that held by the U.S (which holds 8133 tons). I would expect China will quietly increase its gold position for fear that a major announcement would devalue the dollar, and then it would be left chasing gold higher.
Between now and December, I think we’ll see gold at $2,000 and possibly $2,100. Every time this market seems to make a $100 – $150 move higher, it pulls back before charging higher again. On Wednesday. September 7, gold was experiencing a pullback, falling more than $60. So far, these corrections have been good buying opportunities.
Whether you are looking for a hedge against inflation, a way to diversify your current portfolio or purely a speculative play, I believe gold will offer tremendous opportunities for many years to come.
Please feel free to contact me with any questions you may have, and to develop a more specific trade strategy based on your unique goals and risk profile.
Tom Power is a Senior Market Strategist in MF Global’s individual futures trading division. He can be reached at 800-682-8325 or via email at tpower@mfglobal.com
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