Gold is starting to shine

Isn’t gold supposed to shine when we have a financial crisis? So what has taken the shine out of gold since we started this crisis? Gold hit its peak back in March at over $1000, dropped to $700 at its trough and closed at $828 on Friday. Unexpectedly, investors shifting assets to US$ instead of gold during the last 5 months of the financial crisis hurt the price of gold.

The S&P/TSX Global Gold index is a representation of Canadian and other International gold producing companies. Some examples of the Canadian companies represented on the gold index are Agnico-Eagle Mines Ltd. (AEM), Alamos Gold Inc. (AGI), Aura Minerals Inc. (AQI), Barrick Gold Corporation (ABX), Goldcorp (G) and Kinross Gold (K). An example of an International company not traded on the TSX but included in the S&P/TSX Global Gold Index is Newmont Mining Corporation (NEM-N) which trades on the New York Stock Exchange.

When we look at S&P/TSX Global Gold index, it was as high as $390.93 on March 17th this past year and recently, was as low as $153.03 on October 24th this year. This is over a 50% drop in the index from March till the low in October. On Friday December 12, 2008 the Global Gold index was 276.38, a gain of over 50% since the low. The trend is bullish for gold from a technical standpoint, crossing the 50-day moving average on November 21st and now approaching the 200-day moving average at $290. Is this the shine returning to gold?

Recently, gold fell in line with other commodities as the deal to rescue the big 3 US car manufacturers came into question. When people refocused on the bigger picture, problems and risks associated with Global recession, gold increased. Is this the start of gold’s big move? In an article in CNN.com Fortune Magazine, “Gold Shines on”, December 9, 2008, Katie Benner writes about the merits of gold. She argues that Gold is going to shine because of fundamental weakness in the US$. The US$ as a safe haven won’t last long due to the vast amount of currency that the US will have to print to support financial aid for the Auto industry and TARP (Troubled Asset Relief Program), not to mention the spending proposed for infrastructure. All currencies are coming under pressure around the world due to slashing interest rates. This eventually will lead to a devaluation of currencies and ultimately inflation. Donald Luskin, Chief Investment Officer of Trend Macrolytics points out in his article, “The Case for Gold Hasn’t lost Its Luster”, December 5, 2008, that gold is the single most inflation sensitive thing in the world. Even though the bond market is currently telling us that they expect deflation (lower yields on 30 year bonds), Mr. Luskin argues that we will see gold around $1000 within a year as inflationary pressures takeover from all the money the US Government is printing. Lastly, there is an expectation of a shortage of gold supply due to flat production around the world.

Keep in mind that gold has never outperformed stocks in the long term, however, now is a time when gold should shine from a fundamental standpoint. Technically, it is already shining.