Comments on Gold Bull Market

Gold jumped 16.4% in the first three months of 2016, its strongest quarterly showing since the third quarter of 1986, according to FactSet. But in the last three weeks, momentum has slowed, the yellow metal is nearly $70 off its March high and some commentators are saying the rally is over.

In the April 4 edition of the Wall Street Journal headlined, Steven Russolillo writes: “Gold investors should enjoy the party while they can. The good times are probably coming to an end.” Russolillo’s argument is based on what he claims to be the fundamentals. Under the headline “Don’t Bet On Gold Rally to Last”, Russolillo repeats the time-honored argument that gold is going nowhere because of “a fundamental analysis of its intrinsic value: it doesn’t really have any. Unlike many financial assets such as stocks, bonds, real estate, and others, gold doesn’t generate any income.”

Brien Lundin, editor of the New Orleans-based Gold Newsletter, looks instead to the structure of the market. In his March edition, he notes that “gold’s early-year rally began to lose momentum as March wore on, primarily due to profit-taking and a very large accumulation of short positions by the large commercials segment of paper-gold traders on Comex,” he writes.

Lundin says the “massive” commercial short position—a wager that prices will fall—is currently the “primary impediment” for the gold market. Commercial traders use futures to hedge price against risk tied to their businesses.

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“If past form holds true, some of the large entities in the commercial category will hit the market hard with sell orders, to drive the price down and collect on their short positions,” said Lundin. Although he expects a correction in gold in the short term, Lundin says that gold is going much higher. Massive stimulus plans, easy-money policies, bailouts and other government spending are creating tens of trillions of dollars of new currencies. “Over the long term, every currency will be debased; every economy will suffer from dramatic levels of inflation…No currency…no economy…no market offers refuge for investors, except for gold and other tangibles.”

James G. Rickards, financial writer and geopolitical strategist, was interviewed by Jason Burack for Wall Street for Main Street last week and took a more macro approach. Rickards noted that as interest rates increasingly become negative, gold becomes the high-yield asset even though it may pay no interest at all. He also pointed to rising gold purchases by central banks, particularly those of China and Russia, claiming that they are protecting themselves against a likely dollar devaluation, hedging their dollar exposure by buying gold.

Wayne Wile, an international investor, financial analyst and author takes a more practical approach. “I don’t want to sound disrespectful, but sometimes people think too much. Gold has no intrinsic value? It costs about $1200 to produce an ounce of gold, a lot more than it costs for a bank to credit your account with the same amount of dollars. Yes, the commercial short position

is high in terms of the bear market levels of the past five years but I think this is a bull market so the commercial short position is way short of massive.”

Wayne Wile agrees with Rickards that negative interest rates are driving investors towards gold but dismisses the significance of central bank buying, noting “they have never been right about the market direction before so there is no reason to think they have it right now.”

Wile says “this looks to me like a new bull market for gold. The gold stocks are very resilient and they are outperforming gold—a reliable bull market indicator. Volumes are good and the ETFs have added more than $7 billion in gold since the start of the year. Meanwhile, sentiment has backed off and it’s no longer overly bullish. Time to buy the dip,” he claims.