World War 3: Bullish on Gold (NYSEArca:GLD)
In times of War or other upheaval, people turn to Gold (NYSEArca:GLD). When economies wobble and governments fall, Gold has always been seen as the best way to preserve wealth.
The Y-Y change in the consumer price index has already risen from 0 to 2.5%. When one looks at the breakdown of the CPI, the inflation pressures are very alarming, that alone is Bullish for Gold
Interestingly, the core index is up 2.2% Y-Y. But, core inflation would be a lot higher if it were not for deflation trends that have been in place, for some time, in goods prices.
Services prices, on the other hand, have been rising at a 3.1% rate for the last several months. As the USD rolls over, good prices will start to perk up and the overall inflation reading is going to be stronger.
The explosive rise in debt and base money has not been reflected in a comparable rise in the general price level over the last 10 years.
During this same period the US economy grew at a substandard rate and there was substantial excess capacity both in the labor force and in the physical plant and equipment in the US.
But that output gap has been closing, and the unemployment rate has fallen to under 5%. The excess capacity absorb-er of all that extra money is on the verge of ending.
Wage growth has begun to accelerate and inflationary pressures are already evident.
In the short-term, there have been several other variables likely to influence the price of Gold.
One is the change in Muslim Shari’ah Law. In December 2016, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Muslim governing body that creates Islamic financial standards, concluded that Muslims across the globe (1.6-B people who are said to hold close to $2-T in assets) were now allowed to purchase and possess Gold according to new addendums to Shari’ah Law.
The new ruling has been described as a game changer representing a huge potential increase in demand.
The World Gold Council (WGC) has said that the new ruling could stimulate demand for “hundreds of tons” of Gold as retail investors and Islamic banks shore up Gold in their portfolios and balance sheets.
Plus, over the past 7 years, central banks have consistently been net buyers of the precious Yellow metal.
Though the reasons for central bank buying range from inflation hedging to tail-risk management, it represents a change in behavior that is beneficial to overall demand and Gold prices. Although they bought less last year than in Y 2015, net purchases are likely to gain some this year.
Reportedly, 56% of central banks are planning to raise their Gold reserves over the next 3 years.
Next is the notion of “peak Gold production” aka, the maximum rate of Gold production.
Y-Y Gold production has been declining despite technological advances in extraction techniques. The lack of new discoveries and decreasing volume of output by existing mines coupled with the failure to replace reserves in the face of rising demand supports higher future prices.
Also, demand from Asia is poised to strengthen too.
Recent economic events in India and China have had negative short-term effects on Gold demand. These 2 Asian countries make up more than 50% of overall consumer demand and play an important role in the global Gold market.
Prime Minister Modi’s decision to demonetize large rupee notes, a significant portion of overall circulating currency, sent Gold jewelry demand tumbling. India, until recently overcome by China, held the title as the world’s largest Gold consumer.
Meanwhile, in the long-term, demand is expected to return to pre-demonetization levels.
In China, Gold demand was down 14.8% Y-Y in the last Quarter, attributed to a slowdown in overall economic growth. Still, the WGC expects Chinese gold demand to grow by 20% in Y 2017.
Finally, the election of Donald Trump as the US President adds additional luster to the precious Yellow metal. A faster growing economy will generate even more inflation pressure. In addition, many fear that some of President Trump’s policies will create a great deal of uncertainty, driving the worried into Gold to hedge political risk.
On my charts the momentum is building in this Gold Bull’s 2nd upleg. And this is in line with this metal’s usual strong spring rally from mid-March to late May.
After last year’s 200-D MA breakout and Golden Cross confirmed the 1st new Gold Bull since Y 2011, the resulting momentum was so strong Gold rallied right into early July before re-tracing.
Now, Gold’s technicals are Very Bullish for the coming months.
The sentimental impact of this technical action has already been big enough to fuel Bullish changes in gold’s fundamentals. It is not just futures speculators buying aggressively, but longer-term investors.
This is very important for this Gold upleg’s sustanibility, as investment buying is far more resolute. Investors are holding Gold for longer time horizons, usually with Zero leverage, and they control huge sums of capital.
The readiest proxy for Gold investment demand is the holdings of that leading American Gold ETF (NYSEArca:GLD). Unlike global Gold supply-and-demand statistics which are only compiled and published quarterly, this huge Gold ETF releases its holdings daily.
So they are the highest-resolution read available of what is going on in Gold investment in real-time. GLD has seen big capital inflows since Gold’s latest 200-Day MA breakout.
All of the above, taken together add up to a compelling case for prudent investors to be long Gold in some form: either bullion, the major miners and the royalty & streamers in particular.
I have said this before and repeat it here today, that I believe the bullion price could 2X over the next few years, but the Gold-mining producers, which have reportedly cut production costs sharply, could rise sharply too, add to that mix the Royalty & Streamers, and Gold warrants the prudent investors consideration.
|HeffX-LTN Analysis for GLD:||Overall||Short||Intermediate||Long|
|Neutral (0.23)||Bullish (0.29)||Neutral (0.19)||Neutral (0.22)|
|HeffX-LTN Analysis for SLW||Overall||Short||Intermediate||Long|
|Neutral (-0.18)||Neutral (-0.17)||Neutral (-0.21)||Neutral (-0.15)|
|HeffX-LTN Analysis for EXCFF:||Overall||Short||Intermediate||Long|
|Neutral (-0.09)||Neutral (-0.19)||Neutral (-0.15)||Neutral (0.06)|
Have a terrific week.