Recent sell-off sets up next gold rally

When the price of gold plunged 20 per cent last month, many market watchers declared the gold boom over. Stalled, yes; ended, no, according to many gold analysts, who believe the precious metal may instead be near a new sustained rally. “I can tell investors don’t sell off your gold,” says Martin Murenbeeld, the chief economist at DundeeWealth. “We’re at a crossroads here.” During the summer, gold surged 29 per cent to a record high of $1,920 a troy ounce. This jump caused the price to drastically detach from its 200-day moving average, an important trend line in technical analysis that the gold price had closely hugged for much of the last decade. Technical analysts considered this jump unsustainable and in September gold gave back most of these gains. Gold fell to a low of $1,534.49, much to the technicians delight, and it bounced off the 200-day moving average’s support level of $1,527. While most gold watchers expect the metal to experience turbulence during the next few months, the world hasn’t changed much, and gold prices may climb higher because of its status as a safe-haven during turbulent times. “Have the countries around the world solved the debt crisis?” asks Nick Barisheff, president of Bullion Management Group, a precious metals investment company based in Toronto. “Have the bailouts ended? Have their currencies stopped tanking?“ With the world already worried about Greece’s fiscal problems, gold summer’s rally was sparked by fears that the US might default on its debt. After Standard & Poor’s downgraded the US debt, investors flocked to gold as one of the few safe havens left. This raised the specter of recession, which is never good for gold. The combination of increased collateral requirements for trading with falling commodity and stock markets, gold tumbled as investors sold it for liquidity amidst a flurry of margin calls. Still many analysts think the gold market isn’t in a bubble and that the run-up is far from over. Analysts say a bubble is when an asset goes up exponentially 15 to 20 times. Gold is up seven times during the last decade. Since its low on Sept.26, 2011, gold has jumped nine per cent. Most analysts expect the price to retest September’s low during the next few months. If it bounces again that would be the buy signal. Ed Carlson, Chief Market Technician at Seattle Technical Advisors.com says gold could fall as far at $1,460. But even Carlson predicts a new sustained advance will begin after Thanksgiving. The fundamental factors for being bullish are also compelling. Low interest rates are very good for gold. In August, the Federal Reserve promised to keep rates low for the next two years. Additionally, most analysts expect the European Central Bank (ECB) to stem the European debt crisis with a flood of new money. “The relationship between gold and world liquidity is very direct,” says Murenbeeld. “If countries print money gold goes up.” Murenbeeld says there is a high probability that the ECB and the European System of Financial Supervisors (ESFS) will insert a significant amount of money into the system, anywhere from 1 trillion euros to 2 trillion euros. “This liquidity will stabilise the banking sector so that it can withstand a default from Greece and speculation of default from other countries. All that plays into the hands of gold.” Murenbeeld recommends investors use a dollar cost averaging strategy here. “When they do the bailout that will dilute the currency, “ says Barisheff. “The governments will be forced to print more money because politically that’s the least painful thing to do. And as they do the price of gold goes up.” However, Barisheff warns that it’s easy for governments to lose control of their currency, which can send a country into hyperinflation. He says gold will stop rising when governments institute sustainable economic policies, but if inflation isn’t controlled, gold could rise as high as $10,000 in five years. “And there is no appetite to do anything sustainable.”