Gold After the Earthquake, Tsunami, and Nuclear Disruptions

Gold After the Earthquake, Tsunami, and Nuclear Disruptions

You the reader are obviously looking at this because, you too would like to know what is next for Gold.  Well, after the recent dip since the beginning of March and culminating in the "Ides of March" (March 15th), an examination of the Gold price in USD is in order to determine the next phase for Gold:  (Click on the chart to enlarge)

The chart above shows a steep drop happening on the Ides that showed a spread of $60 USD in the drop to just touching the blue 50 day moving average line and then bouncing back.

Today is Saint Patrick's day and this may be a good omen for Gold investors; so using the green theme, the author sees an about-face for the Gold/Silver and mining sectors.  The fall on the 15th was enough and Gold held steady yesterday, March 16th, around the $1400 USD level.  The fundamental drivers for Gold and precious metals have not changed.  For review from an earlier post, these driving forces are:

1. Inflation of Paper Currencies

The markets interpret the FOMC's previous pronouncements as inflationary for paper currencies, and this effect is expected to continue until there are some indications of inflation being reined in. This currency inflation is a fundamental driver for the precious metals.

2. Rise of the World's Middle Class Supporting Gold Prices

There is a rising middle class as the world's emerging markets continue to grow and gain parity with the world's developed markets. The size of the world's middle class growth is largest in the Asian economies and of a scale that the world has never before seen. Asians have a particular affinity for the precious metals due to their history and culture of precious metals being a store of wealth. This buying by emerging middle classes provides a strong base of support for precious metals prices.

3. Peak Gold Is Coming Due to Higher Costs and Lower Grades

Barrick Gold's (ABX) chief executive Aaron Regent already declared a state of "peak gold" in 2009. The thesis is that gold mining is difficult, and the challenges of increasing costs, lower gold grades, and difficult operating environments all coalesce to decrease gold production supply. This "peak gold" dynamic is ensuring that the new production supply of precious metals will be constrained in the future.

It seems, that the author's call for another "Bull Run for Gold" was disrupted by the natural Earth disaster of the Japanese earthquake, the resulting tsunami destruction and the follow-up nuclear debacles.  The resulting stock markets disarray disrupted the upward path for the rise of Gold.
Not to belittle the human suffering impacts of these events, but the news of these happenings should have now been priced into the markets. Other market factors would include the Copper price, which is recovering after being oversold in February due to the Asian Lunar New Year.   Also, the Steel ETF  SLX is bottoming and is showing signs of moving up.  And finally the  TSX Venture has bottomed and is slowly moving higher. These three equities and indices are leaders for the general markets and may be signs that the S&P is due to recover.  The regular markets have had a good shakeout.  Most of the gains in 2011 for most stocks have evaporated due to this shakeout. 

Japan has injected upto $170 Billion equivalents to calm and support the financial markets after the severe drop on March 15th.  The Japanese will repatriate their world-wide investments to fund the re-construction, and the impact will be felt in world markets, but recovery shall prevail.  The FOMC sees no further need for monetary injections in the US as the recovery is strong enough.

In the author's opinion, with the general markets coming back, the Gold Bull Run shall continue.  So, therefore, the Gold/Silver stocks should move forward from here.

Disclosure: The author is long Gold and precious metals and other mining equities.

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