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Gold’s continued advance as stocks recover to previous highs shows something else behind this rally

 -- Published: Tuesday, 18 February 2014 | Print  | Disqus 

By Peter Cooper

The New Year naysayers who predicted a fall in the gold price to nearer $1,000 an ounce than its present $1,323 quite convincingly argued that an economic recovery and higher equity prices this year will be bad for the gold price.

But if that is true why has the gold price advanced again over the past two weeks while stocks have been rallying? Only today the main MSCI global stock index showed that all the losses on equities since the New Year have been recouped.

Another explanation required

Clearly there must be something else to explain why the price has gone up when, according to many professional gold analysts, it should have been going down. One answer of course is that the equity rally is the false signal, not the rising gold price.

We think equities did top out in December and have just put in a neat double top to confirm the end of the rally. Recent data has not been good. US retail sales in January fell the most since June 2012, and jobless claims unexpectedly rose last week. The polar weather is hardly good news.

Positive data on exports out of China does not square with a 52 per cent crash in the Baltic Dry Index of trade since the New Year. UK GDP has turned positive but the country is under water. Japan’s latest GDP figure on the other hand is a major disappointment.

The bearish case against gold for 2014 assumed a continued recovery in the global economy that would raise interest rates and make the cost of holding gold look expensive to investors. What if in fact the central banks are forced to more print money again to offset a weaker than expected economy and a stock market crash?

At the same time there is a ticking time bomb on the supply side for gold. Refiners have been digging into the back of the vaults to meet record demand for the physical metal. Only the dominance of the Comex futures exchange in price fixing keeps the price down. Its reserves of precious metals are also running very low.

Supply time bomb

Chinese and Indian demand for gold continues at high levels despite the latter’s tax on gold. Yesterday there was news of new measures to frustrate the importing of gold by passengers landing in India from the UAE. Meanwhile the Chinese government continues to encourage the buying of gold for its own reasons, thought to be a long-term plan for a gold-backed currency.

Have the top gold analysts got gold prices wrong for 2014? It is a bit early to say but they seem to have been trapped into their forecasts by their own houses’ unrealistic projections for economic growth this year.

The ArabianMoney investment newsletter’s New Year edition for our paying subscribers only explained how gold and silver stood to win however the global economy turns out this year (subscribe here). One of our New Year tips is up 92 per cent!

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 -- Published: Tuesday, 18 February 2014 | E-Mail  | Print  | Source:

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