The gold rally paused Wednesday as traders booked profits ahead of Thursdays key European Central Bank meeting.
The metal was trading near $1,254 early Wednesday, down slightly as markets await more quantitative easing or steeper negative interest rates from the ECB. More QE weakens the euro and strengthens the dollar in the short term, thus facilitating the dip in gold prices Wednesday.
However, the recent move up in gold followed by some profit-taking is normal, noted RBC Capital exec George Gero.
Golds chart still looks bullish, but is overdue for a correction within the context of a bull market, added Michael Armbruster of Altavest.
Fed rate hike likely on hold: Still, the dollars strength shouldnt last for long because the Federal Reserve isnt expected to raise interest rates at its meeting next week, according to the Wall Street Journals Fed expert, Jon Hilsenrath, who wrote that uncertainties about markets and global growth should keep the central bank on hold until at least April or June. Low rates tend to weaken the dollar while strengthening gold.
In fact, any Fed rate hikes could be really dicey for stocks, according to DoubleLine Capital exec Jeff Gundlach, who also reiterated his forecast for $1,400 gold prices this year in a presentation Tuesday.
Heroin and cocaine lifted stocks: Even former Dallas Fed chief Richard Fisher admitted that the bull market in stocks is the result of the monetary cocaine and heroin that the Fed injected into the system the create a wealth effect. Now we are maintaining it with Ritalin, Fisher added. How long can this artificially induced stock bubble last? The cracks have been showing for quite a while.
With the recent rally showing signs of petering out, stocks seem caught in an either-or trap: The deflationary trends exemplified by the slide in oil keep prices depressed, extending the pressure on producers and, most importantly, their balance sheets, wrote Randall Forsyth at Barrons. Or the long-anticipated lift in inflationary pressures may finally be here, resulting in increased wage costs, squeezed profit margins and higher interest rates, which in turn depresses price/earnings multiples.
Gold ETFs log record streak: Gold could continue to rise on fears over the stock market, which isnt out of the woods yet despite recent gains. Allianz adviser Mohamed El-Erian warned in a column that if current economic problems arent solved, the financial volatility experienced earlier this year will not only return; it could also turn out to have been a prologue for a notable risk of recession, greater inequality, and enduring financial instability.
Although the major gold ETF, the GLD, also paused its advance Wednesday, overall gold exchange-traded-fund holdings have logged an amazing and unprecedented 40-day streak of inflows.
Gold supply gap feared: Cautious optimism on gold also was felt at the major mining conference under way this week in Toronto, the PDAC. TD Newcrest analyst Greg Barnes renewed concerns over a looming supply squeeze in bullion. New capital spending has been cut, no one is building new mines, no one is looking for new mines. Well have quite a rally by the end of the decade.
Gold supply is beginning to roll over, he added. Very few new mines are being built and it could be a supply issue in four to five years.
Of course, miners in one part of the world are looking for new gold the Chinese. Chinas state-owned Zijin Mining Group attended PDAC, and its executive director reaffirmed that his company wants to become a global leading company via new projects and acquisitions. Its unlikely, however, that much of that gold will be available in the Western world as China works to increase its holdings, but surreptitiously, without noticeably driving the price up.
Negative rates a golden no-brainer: But the most bombshell statement on golds prospects came this week from legendary gold-mining executive Pierre Lassonde, the chairman of Franco-Nevada Mining, who declared in a BNN interview that the five-year bear market for gold is over and we are at the beginning of a new bull market. And Im very, very sure about that one. If you look at gold today, its moving up in every single currency, every single currency, and thats the definition of a bull market.
The key driver for gold now is the growing prospect of negative interest rates, along with an accompanying war on physical cash, around the world. The biggest knock on gold for the longest time is that you have to pay to carry it; it has a negative carry. Well, now even bonds have a negative carry. Now it becomes, if I look 10 years out, what would I rather own? A government bond, where theyre going to confiscate for sure 6% at the end, or I can buy gold, it doesnt cost me anything to carry, and in 10 years time, it may be worth a factor of that.
Lassonde concluded that the gold-Dow ratio is greatly out of proportion, and a realignment could mean major bullion prices in the future. In 1980 gold was at $800 and the Dow was at 800; in 1934 gold was $36 and the Dow was at 37 where is the Dow today? 16,000. Do I know that its going to go back to 1:1 I dont know, but if history is a bit of a lesson, even if it goes to 2:1, thats $8,000 Im slightly optimistic.