These Gold Charts Will Make Your Heart Beat Faster

Sign up for our free daily newsletter here and never miss an article.

February 14, 2014 

By Frank Holmes 

CEO and Chief Investment Officer 

U.S. Global Investors

Gold lovers’ hearts are beating faster this week, as the metal rose above $1,300 an ounce for the first time since November. The precious metal also climbed above its 200-day moving average, which hasn’t happened in about a year.

ISI’s John Mendelson noted earlier this week that the generic gold future “rallied off its mid-December low and has decisively broken out above its downtrend line connecting the descending tops from late August, a near-term positive.” The next price he’s targeting is $1,350, the price gold was at in late October.

Gold Rises Above Its 200-Day Moving Average
click to enlarge

So while gold may correct over the next several months as the metal enters its seasonally weak period of the year, this looks promising for gold investors.

Here are a few more gold charts that just might have your heart beating faster:

1. The Love Trade Endures in the East
In January, 246 tons of gold were withdrawn from the Shanghai Gold Exchange, as China continues expressing its love for the precious metal. This marks a record level of gold deliveries on the exchange as well as a significant increase over the same time last year.

In addition, you can see on the chart below that January’s total also exceeds world mining production for the month.

Chinese Demand for Gold Remains Robust
click to enlarge

As Ralph Aldis, portfolio manager of the Gold and Precious Metals Fund and the World Precious Minerals Fund, says, “Once the metal moves from the West and goes into China, we won’t get that gold back very easily.”

2. Money Supply Grew Faster in January
In the first month of 2014, the M2 money supply, which is a measure of money supply that includes cash, savings and checking deposits, grew faster than the previous two years. In 2012, M2 grew 7.6 percent and in 2013, money supply rose 4.7 percent; at an annualized rate, January’s money supply growth “reached an annualized rate of increase of 8.75 percent,” according to Bloomberg’s Precious Metal Mining team.

This may mean “the U.S. Federal Reserve is trying to resurrect inflation, thus increasing the appeal of gold, the supply of which can only increase about 1.5 percent to 2.5 percent annually,” says Bloomberg.

Increase in Money Supply Boosting Gold?
click to enlarge

Last year, gold started to take it on the chin when the real rate of return went from a negative 0.62 percent in March to a positive 0.54 percent by December. Like I told Jim Goddard from HoweStreet, a positive real rate of return is typically a major headwind for gold.

Listen to the podcast of the radio show now.

Between March and December of 2013, two things happened: 1) Yields rose in anticipation that the Federal Reserve would begin tapering its bond purchases, and 2) the consumer price index declined. However, going forward, I anticipate that CPI will increase, and, given the modest economic growth we’ve been seeing in the U.S. economy, interest rates won’t be able to rise too quickly.

3. Gold Stocks Poised to Rebound After Rare 3-Year Loss
What I think is tremendously powerful for gold stock investors is this chart. At the beginning of January, we took a look back at the annual returns for the Philadelphia Gold & Silver Index. In three decades, there were only three times that gold stocks only saw a consecutive 3-year loss.

Only 3 Times in 3 Decades Gold Stocks Declined 3 Consecutive Years Gold charts
Gold charts

These aren’t the only gold charts to love. See more in my latest presentation from the World Money Show.

Index Summary

  • Major market indices finished sharply higher this week.  The Dow Jones Industrial Average rose 2.28 percent. The S&P 500 Stock Index gained 2.32 percent, while the Nasdaq Composite advanced 2.86 percent. The Russell 2000 small capitalization index rose by 2.93 percent this week.
  • The Hang Seng Composite rose 2.96 percent; Taiwan gained 1.51 percent while the KOSPI advanced 0.92 percent. The 10-year Treasury bond yield rose 6 basis points this week at 2.74 percent.

Domestic Equity Market

The S&P 500 Index roared back this week in a broad-based rally, rising by more than 2 percent and virtually vanquishing the pullback that began in mid-January. Sector performance had a somewhat unusual mix, with both cyclical and defensive areas exhibiting truly mixed relative performance.

S&P Economic Sectors
click to enlarge

Strengths

  • The utility sector led the way this week with particular strength coming from gas utilities, as natural gas prices shot back above $5.
  • The health care sector was not far behind, with strong performances from biotechnology and medical device makers. Strong performers included Alexion Pharmaceutical, Regeneron Pharmaceutical and St. Jude Medical.
  • Goodyear Tire & Rubber was the best performer in the S&P 500 this week, rising 13.73 percent. Goodyear released quarterly earnings results which were ahead of expectations and the company was able to de-lever the balance sheet, which was a positive surprise for the market.

Weaknesses

  • We experienced a broad-based rally this week, with only pockets of weakness. Airlines were weak on the back of significant weather disruptions along much of the East Coast.
  • The fertilizer group was also weak as Monsanto and CF Industries both experienced modest declines for the week.
  • WPX Energy was the worst performer in the S&P 500 this week, falling 9.11 percent. The company announced its capital plan and production guidance for 2014. Production guidance was weaker than expected, while capital expenditure (CAPEX) is expected to rise by 20 to 25 percent.

Opportunities

  • The current macro environment remains positive as economic data remains robust enough to give investors confidence in an economic recovery, but not too strong as to force the Federal Reserve to aggressively change course in the near term.
  • Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets.
  • The improving economic situation could possibly drive equity prices well into 2014.

Threats

  • A short-term market consolidation period after such strong performance over the past six months cannot be ruled out.
  • Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the potential for policy error is large.
  • A lot of good news may be priced into the market and the economy will need to deliver to maintain the positive momentum in the market.

The Economy and Bond Market

Treasury bond yields were higher this week with the intermediate portion of the yield curve seeing most of the lift. With economic data mixed again and equities rallying, it felt like a “risk on” week, as much as anything driving yields higher. Bad weather was topical again all week and it has definitely had a negative impact on the economy so far this year. While some of the data is being taken with a grain of salt, most investors are giving the economy the benefit of the doubt.

10-Year Treasury Yield
click

1, 2345  - View Full Page