The Market Oracle: Gold Prices Coming to the End of Bear Phase
Source: The Market Oracle
Author: Bob Kirtley
Gold prices are presently being dragged in both directions with the geo-political issues in the Ukraine putting upward pressure on gold as it is viewed as a safe haven in terms of protecting ones wealth. Gold is something you can take with you, should the need arrive and you have to move to a safer location in a hurry. However, for many of us our need to own gold is based the perennial devaluation of our own countries currency. In the world of paper money it is difficult to think of a country where the government is not actively trying to devalue its own currency via various forms of money printing. This form of monetary policy is a short term fix at best as it does not address the basic problem of competitiveness via increased production and better working methods.This is something that we have to live with as our political leaders prioritize their survival through to the next election, rather than do what is best for the longer term.
We have written previously about a possible final capitulation and about monetary policy so today we would like to bring to your attention two other factors that deserve our consideration regarding the direction of the precious metals sector; they are Backwardation and the performance of the US Dollar
Firstly, Backwardation in the price of gold is now more persistent than ever which tells us those investors will pay a higher price today in order to take delivery and secure their purchase. To actually pay now and then have to wait months before your gold is dispatched has the inherent risk of it never being dispatched and/or some sort of cash settlement being offered if an order cannot be completed. To be willing to pay more money today for gold than buy it cheaper in a few months’ time suggests a lack of trust in the current system of futures trading.
Secondly, the US Dollar has an adverse relationship with gold so when it rallies gold prices tend to fall and when the dollar falls gold tends to rise. We can see that the dollar is struggling to hold above the ‘79’ level on the US Dollar Index.
Should it close for a few days or more below this level we could well see it sold off and drop to around the ‘72’ level in short order. It doesn’t sound like much but it is a fall of almost 10%. Should gold in turn rally by 10% then we would have gold prices standing at $1430/oz. This move up could well be the catalyst that ignites a full scale rally in gold prices.
Conclusion
Should the dollar start to plunge then gold prices will increase dramatically. We are looking forward with great excitement for this bull to resume its trek north.
If you are new to this sector of the market do the work right now as the next month or so could herald changes of such magnitude that it will take your breath away.