Gold: Better Times Ahead?

03/14/2014 9:00 am EST


Gold bullion, which was down 28% last year, is up 12% so far this year; the gold mining stocks, down 49% last year on average, are up 20% so far this year, explains Sy Harding, editor of Street Smart Report.

In January, I noted how it is often a mistake to chase the previous year’s winners after they have already had several years of gains.

I quoted John Rekenthaler, VP of Research at Morningstar, who says that almost always, “Investors piling into the hottest funds of the previous period will be sorry, since the lower-ranked funds tend to be the winners over the next three-year period.”

I noted, in that column, that if it is advisable for investors to choose from the previous period’s losers, there was one stand-out—gold. So far that is working out. Gold, down 37% last year from its 2011 peak, is up 12% so far this year.

Gold does have a few positives going for it this year that it didn’t have last year, in addition to the much lower price.

For instance, beginning in 2012, India, the world’s largest consumer and importer of gold, raised its import tax on gold from 2% to 10%, in an effort to cool-off demand for gold (which was draining off too much cash from India’s economy).

The move worked to slow demand for gold, but created a hardship for India’s important jewelry manufacturing and exporting industry. Beginning last fall, India has been cutting back the gold tax, and is expected to continue to do so.

Gold is also the traditional hedge against global instabilities and uncertainties. It spiked up to its record $1,900 an ounce in 2011, as the ‘Arab spring’ uprisings, which began in Egypt in 2010, began to proliferate into neighboring countries. Those uprisings settled down considerably in 2012 and 2013, and gold plunged in its 37% bear market decline.

However, this year’s eruption of violence in South Sudan, and the civil wars in Syria and Ukraine (now with Russia’s involvement), among other global hotspots, have global uncertainties back in the headlines.

We primarily utilize technical analysis for our buy and sell signals, but the fundamentals seem to also support a positive outlook for gold. So far this year, it also confirms the notion that the previous period’s losers are often the winners in the next period.

To benefit from this trend, I have positions in the gold bullion SPDR Gold Trust ETF (GLD), and the gold mining stocks ETF, Market Vectors Gold Miners (GDX).

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