Sean Brodrick: With gold prices at a one-month low, many investors are looking for clues about where they’re heading next. And so, today we’re going to look at two charts and two forces that are driving prices as we head into year-end … and those prices look to be going higher.
Is this a buying opportunity before the yellow metal takes off even higher? You be the judge …
First, let’s start with a chart from Waverly Advisors, which tracks the price of gold against the U.S. monetary base.
You can see that prices and the monetary base have increased together since around 2007. So what’s happened recently with the money supply?
Source: Waverly Advisors
Here in the United States, M2 Money Supply includes money and “close substitutes” for money. This number is used for forecasting inflation. M2 is growing at 7.38%, compared to 7.78% last week and 9.75% last year.
So, it’s down year-over-year, but it is up from the summer low of 6.1% in August, and is higher than the long term average of 6%.
While money supply growth flattened and then declined in the earlier part of this year, it is now picking up again. If recent history repeats itself, that should be bullish for gold.
The official inflation rate is 1.6%. That’s less than the Fed’s original target rate of 2%. So, I think this increase in money supply that we can see on the chart is just the start. In other words, the Fed has plenty of room to keep printing.
Many investors are already betting that inflation is around the corner, or at least that the Fiscal Cliff could plunge us into financial uncertainty. And guess what they’re buying to protect themselves?
Silver, Gold American Eagle Sales Soaring!
November and December are historically strong months for gold sales — but January and February aren’t bad, either.
The U.S. Mint recently reported that sales of Gold Eagle coins this November were TRIPLE the sales of a year earlier. Investors scooped up 131,000 ounces of American Eagles from the U.S. Mint in November. That marked the strongest November since 1998.
Meanwhile, sales of American silver eagles doubled year-over-year, at slightly over 3 million ounces. But this “soaring” interest in the metals isn’t just limited to the U.S.
Indian Marriage Season Starts off with Cold Feet
For Gold Buyers, But it’s Warming Up
Part of gold’s strength historically comes from India, and this buying season is no different. But this holiday’s strong sales there have come as a bit of a surprise.
That’s because India’s government has been trying several tactics to reduce gold bullion imports, which weaken the country’s current account deficit. These tactics include preventing banks from issuing loans on gold bullion purchases and hiking the import tax rate.
But like the voter crackdown in the U.S., India’s gold crackdown seems to be having the opposite effect.
In fact, the World Gold Council now says it believes Indian demand for gold bullion in 2012 will end up reaching approximately 800 metric tons, a substantial increase from earlier estimates of 650 to 750 tons.
Meanwhile, The HSBC/Markit PMI survey for India showed a healthy jump in the index to 53.7 from 52.9 in October. Coming after last week’s third-quarter GDP figure, which showed an annual increase of just 5.3%, the lowest in three years, it could be a sign that India’s economy is bottoming out.
If consumers in India start to feel their economic situation is improving, it’s likely they’ll start picking up more gold again.
An economy that is showing signs of improvement is China. This should put more money in the pockets of Chinese workers, and China has a historical affinity for gold.
Bottom line: There are plenty of forces coming together that should be good for the yellow metal.
It is true that we have seen weakness in the price of gold recently. Gold is suffering somewhat of an identity crisis, with its relationship with risk fluctuating as investors remain unclear whether or not to treat the metal as the “safe haven” that it is traditionally billed.
However, the uptrend remains intact, and this weakness is potentially a buying opportunity before the next big move higher.
This tells me that pullbacks can be bought — and we should see a great first quarter for gold.
Related: SPDR Gold Trust (NYSEARCA:GLD), ETFS Gold Trust (NYSEARCA:SGOL), ProShares Ultra Gold (NYSEARCA:UGL), PowerShares DB Gold Fund (NYSEARCA:DGL), iShares Gold Trust (NYSEARCA:IAU).
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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