Buying Opportunity for Gold

07/15/2014 9:00 am EST

Focus: COMMODITIES

Joon Choi

Senior Portfolio Manager, Research Analyst, Signalert Asset Management LLC


It was rough time for gold investors over the last few years; however, gold now seems poised for a major breakout, technically and fundamentally, suggests Joon Choi in Systems & Forecasts.

In my opinion, there are three primary drivers of gold prices; which are listed below:


1. Inflation—In an inflationary environment, investors tend to buy gold to protect themselves from higher prices.  As central banks around the world are printing money to lower interest rates, inflation may pick up in the future.

For instance, the consumer price index (CPI) has been in an uptrend with the most recent reading at slightly above 2%; the highest level in the last 18 months.

2. Geopolitical risks—Investors seek safety and, therefore, buy gold when there are geopolitical tensions.

3. Value of the Dollar—Since gold is priced in dollars (similar to oil), a significant drop in the dollar may lead to an increase in gold price.

Technically, the monthly chart of the SPDR Gold Trust (GLD) has slightly broken through the downtrend from September of 2012 while the 12-26 month MAC-D is about to cross the nine-month signal line.

If GLD rises this month then it would be considered a breakout which would, in turn, be very positive for gold price.

GLD underperformed the S&P 500 Index (SPX) by 9.4% in 2012 and 60.6% in 2013. But through the first six months of 2014, GLD is up 10.27% and S&P 500 Index is up 6.95%; an outperformance of 3.32% (first time since 2011).

Fundamentally, two of the three factors that drive up gold prices (rise in inflation and geo-political risks around the world) seem to be in place for a sharp appreciation in gold prices. Technically speaking, the monthly chart of GLD is poised to break the downtrend from 2012.

I strongly recommend that you take a GLD position if you haven’t already because we may see a solid rebound in gold prices, possibly performing better than the S&P 500 Index in the coming months.

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