Friday, January 29, 2010

Gold Investment: Gold Is Well Positioned To Make A Run

When fear in the market is high, gold is in a good position to grow in value. While energy prices could fall if the global economy weakens, gold may ready for another bull run. See the following post from Expected Returns.

Over the past couple of months, gold has slowly retreated from all-time high prices, losing mainstream media coverage in the process. As veterans of the gold market know, gold makes its major moves when no one is paying attention. I don't know whether gold will explode higher today or 6 months from now, but I believe it is time to accumulate.

U.S. Dollar

Weakness in gold has, not surprisingly, coincided with dollar strength. The dollar is solidly above its 50-day moving average and has just broken through its 200-day moving average. If the dollar can hold above 78.5 on the dollar index, expect to see further strength.

Gold is firming up a bit here at the same time the dollar is showing strength. Gold is sitting in the lower range of a multi-week consolidation pattern, which suggests gold is a buy right now. Until we bust out of this range in either direction, I will use all pullbacks in gold to add to positions.

Gold Stocks

If I were looking to enter the gold space right now, I would turn to gold stocks. Gold stocks have taken a beating along with the general market. Most people are concerned about the effect of potential crash conditions in the stock market on gold stocks.

While these concerns are valid, I believe one should buy when value presents itself. Relative to the value of gold, gold stocks are very cheap. The rising gold:xau ratio demonstrates the relative undervaluation of gold stocks.

In valuing gold stocks, keep in mind that energy costs are likely to remain depressed relative to gold as the global economy weakens. Although gold and oil are lumped together in the general category of commodities, they are driven by different fundamental factors. While both commodities are subject to the rules of supply and demand, only gold shines in an atmosphere of fear. After all, people don't store barrels of crude oil when they mistrust governments or currencies.

Once fear reenters the system, gold stocks will explode.

We are currently at an interesting juncture where both the dollar and gold are showing strength. Perhaps gold and the dollar are close to decoupling for good, which I believe will be the signal that confirms we are now entering the most powerful phase of the gold bull market.

I understand that it is hard for investors right now to pull the trigger on gold stocks, especially given the obvious weakness in the general stock market. However, gold shares will likely decouple from the general market in the same way they did during the Great Depression, and more recently, in the first half of 2009. I will continue to buy on weakness, and hopefully, ride this bull market to its conclusion.

This post has been republished from Moses Kim's blog, Expected Returns.

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