The Fundamental and Technical Argument for Higher Gold Prices

I am going to say it one more time, gold bullion prices are going higher. The shares of quality junior and senior gold mining stocks offer tremendous opportunity for investors.

World central banks will increase gold bullion purchase to 439 metric tons in 2012 to diversify their foreign exchange reserves, and protect themselves against inflation. (Source: Bloomberg, September 4, 2012.)

These central banks have bought 34% more gold bullion in the first half of 2012, compared to first half of 2011. Could central banks be running to gold bullion as a safety net to inflation? Or could they be protecting their reserves from a falling U.S dollar?

Here in the U.S., the job report this past Friday has increased the chances the Federal Reserve will intervene in the markets and try to stimulate the economy once again via a third round of quantitative easing (QE3). It’s a fancy name for more money printing. We had an increase in the Fed’s balance sheet of $1.25 trillion from 2008 to 2010 (QE1), then $600 billion from 2010 to 2011(QE2). (Source: Bloomberg, September 7, 2012.)

There is no clear indication of how much money the Fed will print in its next round, but I do know that, the more it prints, the more inevitable the devaluation of the U.S. dollar is. Gold bullion can definitely provide safety against a falling greenback.

Not only does increasing demand from world central banks dictate that gold bullion prices are headed higher, but also, looking at the gold bullion price chart, the picture become clearer. It shows another reason to believe that gold bullion prices are heading higher. (Also see: “China to Become World’s Biggest Buyer of Gold in 2012.”)

Gold Spot Price Stocks Chart

Chart courtesy of www.StockCharts.com

Looking at the chart above of gold bullion prices, we can see there was a consolidation period in which the price moved into a narrower and narrower trading range. In technical analysis terms, this type of consolidation is called a “symmetrical triangle”—a pattern that shows a trading range getting smaller with time for which price direction can only be predicted after the price breaks above or below the trading range (black lines).

Last week, gold bullion prices broke to the upside of the symmetrical triangle (green circle). Technical analysts would agree this is a bullish sign and we are going to see higher prices for gold bullion.

Gold bullion has gone up significantly since the recession of 2008-2009. The recent consolidation in gold prices was much needed, as an “uptrend” without any consolidation is usually a sign of a bubble—something not present in gold bullion prices.

Gold bullion prices reached $1,920 an ounce back in September of 2011—the highest price ever. Money printing by world central banks, the devaluation of the U.S. dollar, and inflation fears will eventually propel gold bullion prices much higher.

Where the Market Stands; Where it’s Headed:

There’s not much else I can say about the stock market I haven’t already said in my lead article today. I believe we are near the end of the bear market rally that started in March of 2009. This is a “sucker’s rally” also often referred to as a “dead cat bounce.”

The purpose of a Phase II secular bear market (where I believe we currently are) is to lure investors back into stocks with the false sense that the economy is improving and that stocks are a good place to be again. In reality, the stock market has only held up the past three years through artificially low interest rates, record government debt, and money printing—there has been no structural improvement to the economy.

What He Said:

“The Dow Jones Industrial Average, the S&P 500, and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in Profit Confidential, November 29, 2007. The Dow Jones Industrial Average peaked at 14,279 in October 2007. A sucker’s rally developed in November 2007, which Michael quickly classified as a bear trap for his readers.” By mid-November 2008, the Dow Jones Industrial Average was at 8,726.