Saturday, 20 August 2011

Listen to What Gold Is Telling You!

 

Sean Brodrick

Recently, we’ve seen stocks tumble … industrial commodities come under pressure … and oil drop sharply … but gold keeps breaking one record after another. I think gold is telling us something, and we’d be wise to listen.

In fact, it can be a very profitable message, as gold goes to $2,000 an ounce and beyond, more quickly than most folks will believe possible.

Here’s what I’m hearing from gold …

1. Things Are Bad … and Likely to Get Worse

On Saturday, I wrote a blog post that was a round-up of economic woes, called “The Economy’s Terrible, Horrible No-Good Very Bad Trend.” I gave a long list of bad news in hiring, manufacturing, economic growth and more.

The economic news continues to get worse, and there’s no light at the end of the tunnel. Just listen to the Federal Reserve. On Tuesday, the Federal Open Market Committee (FOMC) released a statement saying that growth this year is slower than expected. More importantly, the FOMC said “economic conditions … are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

So the Fed doesn’t expect the economy to improve by mid-2013? When the government is willing to admit something that bad, you can bet your bottom dollar the real news is much, much worse. And in an uncertain environment, the safe haven appeal of gold really starts to shine. That’s why gold has been soaring in the past few weeks while stocks got crushed.

In the short-term gold’s outperformance of stocks is especially dramatic, but longer-term, gold still shines in comparison. Gold is up more than 45% in the past year, compared to a gain of less than 5% racked up by the S&P 500.

Now, some people might say that gold’s rally is over — that this is as good as it gets. On the other hand those are the same people who said that gold was too expensive at $750 … that gold would never get above $1,000 … that gold was impossibly overpriced at $1,500.

So you have to decide: Are you going to believe the naysayers or your own eyes?

Speaking of safe havens and bottom dollars …

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2. The U.S. Dollar Is Losing Its
Safe Haven Status … Fast!

It used to be that when investors worried about stocks, they’d go into cash. While they are still doing that to a certain extent, take a look at a longer-term chart of the U.S. dollar.

The dollar is being hammered lower by a weakening economy and increasing expectations that the Fed will unleash another round of quantitative easing (QE3) to boost the economy (or at least stock prices).

In July, during his Congressional testimony, Fed Chairman Ben Bernanke made it clear that another round of quantitative easing would depend on both a further deterioration in the economic outlook and the renewed threat of deflation.

Clearly the economy is weaker than the Fed’s forecast in June. And there have been some initial signs of disinflation (Core PCE increased 0.1% in June or 1.3% annualized).

So, the table is set for more quantitative easing. I don’t know if it will prop up the stock market — all the stock market gains made from the Fed’s QE2 money-flood have dried up. But more quantitative easing will likely hammer the dollar and boost gold even more.

3. Mom-and-Pop Investors Are
Following Smart Money into Gold

Take a look at this chart of exchange-traded funds that hold physical gold …

A whopping 91,040,000 ounces of gold was recently held by various physical ETFs around the world. This is the most ever! While the smart money has been buying gold for some time, according to data from BlackRock, over the past year there has been a noticeable shift from larger institutional purchases of gold and silver ETFs to a significant increase in individual investors.

For a long time, market analysts like me have said that the real bull market in gold will finally begin when Mom and Pop start buying it. Maybe we’re starting to see that sea-change in investment. And man, that could be big!

How You Can Play It

The bottom line is that gold is telling me we’ll see $2,000 gold in fairly short order. As I explained in Tuesday’s video, “Is Gold’s Next Stop $2,000 an Ounce?,” the market likes round numbers. And we’re getting to the point where $2,000 is going to act like a magnet, drawing more traders into the market and gold prices higher.

My intermediate-term target on gold is $2,090. After that, we’ll see.

But you can still play this move. The SPDR Gold Trust (GLD) is a perfectly fine way to play this move, though my Red-Hot Global Resources subscribers are using another gold fund.

One interesting note is that gold miners, which have underperformed the metal miserably for months now, are starting to improve. Many miners are real values with gold at current prices — and will be even more so when gold hits $2,000. The Market Vectors Gold Miners ETF (GDX) holds a basket of the best miners, and is an easy way to play this group.

Yours for trading profits,

Sean

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