“Gold, gold, you’re making me old”

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These words were coined by long-timer Richard Russell (Dow Theory Letters) in frustration with gold bullion’s performance. Since hitting $982 on June 2, the yellow metal has been correcting almost half of the rise that began in April.

When it comes to gold bullion and gold stocks, I need to confess I started my investment career in 1984 as none other than a mining analyst. Ever since those days of calculating net present values on my trusted HP 12C I have been intrigued by the shenanigans of the yellow metal and related stocks. And I have also learnt over the years that one should never underestimate the ability of the gold price to surprise when least expected.

As printing presses are running at full speed to produce ever-increasing quantities of fiat money as governments engineer the greatest asset price reflation in human history – and the US greenback is heading south – the longer-term fundamental case for the yellow metal is arguably positive. Marc Faber, author of the Gloom, Boom, & Doom Report, yesterday said in a CNBC interview he was “100% sure” that the US will enter hyperinflation because of the Federal Reserve’s reluctance to raise interest rates.


Meanwhile, Germany, which was literally wiped out in the 1920s by hyper-inflation and has long been fearful of inflation and attracted to the safety of gold, has just announced that Germans will soon have the ability to buy gold as easily as buying a chocolate bar. Gold vending machines will be installed at 500 locations, including railway stations and airports, throughout Germany and will dispense 1 gram wafers, 5 gram bars and gold coins. This development is a vote of no confidence in fiat currencies and it would not be surprising also to see other nations adopting this concept.

The following excerpt comes from an excellent report on the fundamental case for gold by London-based Bedlam Asset Management:

“It is very easy to make a case that the gold price could enjoy or suffer (depending on your point of view) an explosive run. Given all economies (and businesses) are cyclical, then it is axiomatic that over time they will also revert to the mean. Therefore it can be expected that not just central banks, but also commercial banks and other financial institutions will revert to earlier policies of the 1970s and ’80s – of holding a proportion of their ‘core’ capital in gold. Governments could try to prevent wider gold ownership as before, but new forms of ownership – such as gold ETFs – make it difficult to do so unless all leading nations agree simultaneously.

“… our damp rabbit’s foot hints at a much higher price before the end of 2010 because the triggers are already in place: the absence of meaningful new mine supply, the cessation of central bank sales, explosive growth in money supply and of course, rising political uncertainty, which is the Siamese twin of recessions.”

Click here for the full report.

However, the shorter-term technical picture is looking rather uncertain. This is explained by Adam Hewison of INO.com who prepared a short technical analysis of gold’s most likely direction and important chart levels. (The analysis was done on Monday with the gold price at $928, but is still as relevant today as it was a few days ago.)

Click here or on the image below to access the video presentation.


Although I am bullish on gold in the medium to longer term, it is unclear whether gold’s retreat has been completed. Sharp and violent corrections are quite typical of gold bull markets, but I would be inclined to delay purchases until a clear chart reversal manifests itself, which may or may not happen at lower levels.

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