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Why gold will continue to outperform stocks in the second half

 -- Published: Sunday, 3 August 2014 | Print  | Disqus 

By Peter Cooper

Reading some of the recent obituaries on gold recently and you could be forgiven for thinking it was the stock market that is up 10 per cent so far this year and not gold.

US shares have just given back all their gains of 2014 and are heading into a market rout as the Fed finally closes down its QE market support program in October. Stocks have only been more highly valued twice in recent history, in 1929 and 2000, both years of market crashes.

Golden opportunity

On the other hand, there is plenty of reason to think gold has further to rise in the second half. The precious metal is still deeply oversold from its 28 per cent decline last year.

Autumn is traditionally a strong time for gold prices due to the so-called ‘love trade’ of religious festivals. Hedge funds know this trend and trade it.

We also think the gold bears have gotten things completely wrong. They reckon that higher interest rates are coming as QE money printing is ended this October and that will be bad for gold.

But the winding-up of QE is going to crash global stock markets and result in a very rapid reversal of Fed monetary policy. As in 2008 the biggest beneficiary of the Fed’s easy money after the stock market crash will not be equities but gold and silver.

It probably won’t be any different this time. The bearish analysts from the gold bullion banks are trapped by their own false hypothesis about an economic recovery which is not happening outside of cities like London and New York where the stock market boom has had the biggest impact.

Yet the real issue is not what this error of judgment means for the price of gold but its implications for global stock markets.

Last week’s Wall Street sell-off on a further $10 billion reduction in the QE program to $25 bullion by the Fed was just a shadow of the collapse to come when this market support mechanism is removed entirely in October. The Fed will be forced to do a massive U-turn in monetary policy.

Dollar collapse?

Then you have to consider what this will mean for the bond markets and the US dollar. The dollar’s recent recovery will be over. The debt mountain will return to haunt it. After the initial rally T-bonds will be dumped by holders worried about the future.

As bonds and equities, and by extension real estate, enter bear markets there will be only one safe haven that remains afloat and that will be precious metals.

The rush of money into this narrow market will spike prices much higher. It’s taking longer than the gold bulls expected a few years back but we are getting there now.


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 -- Published: Sunday, 3 August 2014 | E-Mail  | Print  | Source:

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