The Bug is on the crawl

Could we see gold prices crawl above $1000 per ounce? Gold rose to almost $950 recently and has maintained its position above $940 per ounce this week. Its rise from $910 was largely driven by inflation fears partly due to a rise in oil and partly due to a rise in debt issued by the US Government. After a rise above $70, oil has pulled back due to supply concerns and a bearish report by the IEA. Nick Vincour reported in Globeinvestor that “A cautious approach to risk kept global stock markets in check, while crude held under $70 per barrel following a bearish report on demand from the IEA, sapping gold’s appeal as a hedge against oil-induced inflation”. Based on this, some analysts believe gold is set to drop. The other side of the argument is that if markets sell off, gold will rise as a hedge against risk.

Let’s look at what has occurred over the last year and how it has reacted relative to the TSX. A good example would be to look at XGD. XGD replicates the performance of the S&P/TSX Global Gold Index and is managed by Barclay’s iShares. Some of the companies that make up the top ten holdings of the index are Barrick Gold Corp, GoldCorp Inc., Newmount Mining Corp, Anglogold, Kinross Gold Corp, Agnico-Eagle Mines and Yamana Gold Inc.

Since October 2008 XGD has doubled from $10 to $20 while the top 60 stocks (XIU) moved from roughly $14 to $15.95 over that same period. You have to be careful taking a point in time to measure results because there is a lot of volatility and time series distortion, however, it does suggest that with perceived risk, gold tends to do well. With the exception of a few brief periods Gold has been trading above its 50 and 200 day moving average since December 15, 2008. On June 24, 2009 the current price crossed the 50-day moving average with a spike in relative strength and a positive signal from MACD (moving average convergence divergence). Although these indicators are positive, there has been a decline in volume, which is not positive.

A great quote in John Mauldin’s recent article “The end of the Recession” is that “in the short run,” St. Graham said, “the market is a voting machine. In the long run it is a weighing machine.” He goes onto explain that he voting is based on current sentiment, but what the market weighs in the long run is earnings. I would argue the recent rally in the TSX is more supported by sentiment vs. earnings and while the market is weighing in we may see gold crawl past the $1000 again. Let’s see what happens after this quarter ends June 30, 2009.