Since the beginning of the year, one asset class has shone when compared to the stock market. I am talking about gold bullion. The yellow shiny metal’s prices are up more than 10%. The stock market, on the other hand, hasn’t performed as well. For example, year-to-date, the S&P 500 is only up by little more than one percent. With this said, I believe gold bullion can surprise investors even more this year.
Let me explain why…
Looking from a technical analysis point of view, there are a few interesting developments that suggest gold bullion prices are heading higher. Remember the first rule of technical analysis: the trend is your friend, until it’s broken. With this in mind, please look at the chart below.
Chart courtesy of www.StockCharts.com
The downtrend that gold bullion prices were following since late 2012 has now been broken (black line). At the same time, we see prices breaking above the 200-day moving average for the first time since early 2013 and sustaining above the 50-day moving average. This suggests sentiment is turning bullish. In addition to this, we see indicators of momentum, like the moving average convergence/divergence (MACD), suggest bulls are in control (as indicated by the black line below the chart).
The fundamentals of gold bullion prices are suggesting investors are going to reap rewards as well. The demand continues to increase and the supply remains subdued. This is the perfect recipe for higher prices.
In 2013, we saw central banks buy gold bullion; they have been net buyers of gold bullion since 2009. It will not be a surprise to see them buy even more gold bullion, considering currencies in the global economy are showing wild movements. On top of consumer demand—which we are seeing from China, India, and other countries—central banks buying the yellow metal just creates more pressure on the supply side.
Last year, gold bullion prices fell victim to irrational selling; 2013 was not the year for those who bought gold-related investments. The sell-off that took place last year took out the speculators, and we are now starting to see some real buying.
I don’t exactly know where gold bullion prices will go—it’s very difficult to place a specific target. I don’t think anyone can tell this. But looking at all the fundamentals and the technicals, I can’t help but be more bullish than I was before.
Investors who are looking to profit from gold bullion prices have to look at their risk tolerance before making any buying decisions. Investors have to keep in mind that in the world of finance, a lot can change in a matter of days, so the riskier your bets are, the bigger the loss or profit is going to be.
Investors with a low tolerance for risk may want to look at exchange-traded funds (ETFs) like iShares Gold Trust (NYSEArca/IAU). For those investors who are looking for leveraged returns, they may look at ETFs like Market Vectors Gold Miners ETF (NYSEArca/GDX). For those who are willing to take on extraordinary risk, you might consider looking at ETFs like Direxion Daily Gold Miners Bull 3X Shrs (NYSEArca/NUGT).
~ by Mohammad Zulfiqar, BA
This article was originally published at the Daily Gains Letter