by Tom Power
Gold and silver continue their bullish ways, with gold reaching a new all-time high of $1,486 an ounce and silver a 31-year high of $42.57 an ounce on Friday, April 15, 2011. If you haven’t been involved in the metals markets over the last few years then you’ve missed out on some great opportunities. But don’t think you’ve missed the boat completely. I think if anything the fundamentals behind the move are still in play and possibly even more so now that they seem to have been confirmed. Let’s take a look at the factors that are attracting investors to gold.
One major supporting factor for metals continues to be the U.S. dollar, and the fact that our Federal Reserve continues to print money at an alarming rate. The ICE Dollar Index futures contract, which measures the dollar’s standing against a basket of six global currencies, has fallen to the lowest level since December 2009.
Massive budget deficits and spending are out of control and adding fuel to rising inflation. And for any one that doesn’t believe in rising inflation, just take a look at a chart of nearly any commodity and you’ll see they all headed in the same direction. The Federal Reserve is maintaining an easy money policy and bank lending rates are near record lows.
As a result of this loose monetary policy, we are now experiencing inflation. Over the past 12 months, consumer prices have climbed 2.7 percent, but if you look at the past three months, inflation is rising at an even faster annualized pace, mainly due to food and fuel.
However, in the most recent employment report, wages were not rising; they were flat from the month before. As long as we continue to have 14 million Americans out of work, it’s very hard to see a big jump in wages.
I think one other major issue we’re going to continue to face throughout 2011 and into 2012 is the threat of defaulting governments. If the European Central Bank continues to tighten policy, then I think defaults will become inevitable. Ireland has already been forced to take a bailout, Portugal seems to be teetering on the edge of a major collapse, and Spain doesn’t seem to be too far behind them. If the Euro currency continues on a tear vs. the dollar, then it will choke European exporters and add even more damage to the Eurozone.
Gold has been volatile, with a few hiccups this week on the road to new highs. May futures are currently finding support in the $1,450-$1,460 range. I don’t believe shorting this market right now is wise, and I would expect any bearish action over the next few days to be very choppy and difficult to follow. I’m looking for an upside target of $1,500 within the next three to six weeks.
Silver has outperformed gold this year, but gold is typically seen by investors as a hedge against inflation as well as a safe-haven investment, and I think in the long run, gold will outperform. Silver has staged a major move, but I think it will have trouble continuing at this pace. My near-term top is $50. But, be cautious of profit taking corrections for gold and silver.
If you would like specific trading strategies for these markets or others based on your goals and risk-tolerance, please feel free to contact me directly.
Tom Power is a Senior Market Strategist with Lind-Waldock. He can be reached at 800-682-8325 or via email at tpower@lind-waldock.com.
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