Four Forces for Gold’s Next Rally

by Sean Brodrick, Resource Strategist, The Oxford Club
Wednesday, January 22, 2014: Issue #2212

Gold has inched up lately after a terrible 2013. Skeptics believe the recent positive action is insignificant – just a natural bounce after a terrible 2013 or the result of worries about inflation.

China’s Demand Shifts Into Overdrive. The Shanghai Gold Exchange, China’s biggest spot bullion market, delivered 2,197 tonnes to customers in 2013, compared with 1,139 tonnes in 2012. Now, with Chinese New Year looming at the end of the month, the Chinese are buying by the boatload.

In fact, the Shanghai Gold Exchange reported 79 metric tonnes were withdrawn in just the five trading days through January 10.

Exchange-Traded Products Are Buying Gold Again. Exchange-traded products (ETPs) that hold physical gold sold the metal hard in 2013. Their holdings fell 33% by the end of the year. Now, that tidal wave of selling seems to be done. In fact, Barclays reports that ETPs saw their holdings rise 7.4 metric tonnes on Friday. This is the largest daily inflow of gold into ETPs since Jan. 31, 2013.

HSBC analysts saw this as pretty bullish. "The last time holdings increased by that much was in November 2012 when gold prices were trading over $1,700 per ounce," an HSBC analyst said in news reports.

Signs of Technical Strength. Looking at a weekly chart of gold, you can see that the metal seems to be putting in a double bottom.

http://www.investmentu.com/images/
0122_GoldPrices.jpghttp://www.investmentu.com/im
ages/0122_GoldPrices.jpg

You can see that gold bottomed in late June and then again in December. Even if the big downtrend reasserts itself, gold should at least test its first overhead resistance of $1,275. And I believe it could go much higher.

Tapering Hasn’t Hurt Gold. The recent rally comes despite the Federal Reserve’s announcement that it will reduce its monetary stimulus by $10 billion. More cuts are expected. Less free money going into the system should be bearish for gold. Instead, the Fed’s tapering is having the opposite effect.

When something goes higher in the face of "bad" news, that’s often the most bullish indicator of all.

How You Can Make the Most of Gold’s Next Rally

There are a number of ways to play rising gold prices.

• Buy Physical Gold. Owning some bullion is not a bad idea as long as you stick within The Oxford Club’s guideline of no more than 5% of your investments in precious metals and related stocks. Physical gold is insurance against just about anything. Unlike other investments, gold never completely loses its value. Gold will be worth something from here to the next ice age.
• Buy ETFs or Funds. These could be funds that hold physical gold, like the SPDR Gold Trust Shares (NYSE: GLD) or the Market Vectors Gold Miners ETF (NYSE: GDX). There are many gold-related funds; you just have to find the one that suits your investing needs.
• Buy Miners Leveraged to Gold. All miners got beaten into the dirt in the last year. Now, some perfectly good gold producers are priced like their shafts are on fire. There are some extraordinary bargains you can pick up for pennies on the dollar, if you know where to look. Do your homework and your due diligence, and know what price you’ll sell at before you buy.

Last year was horrible for miners. It’s a truism of the market that bad years are often followed by very good years. I think 2014 will be a very good year indeed.