Money Week: Is this the turning point for gold?

Source: Money Week

Gold has had a good year. From its New Year’s Eve low of $1,181 per ounce, to its close yesterday of $1,290, it has risen by more than $100 – about 9%.

I must confess to being optimistic.

I like the way that gold has reacted to the deflationary pressures of a falling stock market. Money appears to have rolled out of stocks and into gold. This might just be a re-balancing act following an over-bought stock market and an over-sold gold market. That said, it is positive action.

I like the way gold is sitting above its 21- and 55-day moving averages. That’s indicative of a new, rising trend forming, which is also positive.

And I like the way gold reacted to Janet Yellen’s first remarks as head of the Federal Reserve, which indicated that she’s going to continue where her predecessor Ben Bernanke left off. Gold rose over 1% on the day.

A number of bears have pointed out that silver, which tends to lead gold, has only equalled gold’s gains of 9% since 31 December. As silver is ‘higher-beta’ (City speak for ‘more volatile’), you would expect to see higher gains.

But I don’t agree with this view of silver. As far as I can see, silver tends to outperform gold later in the cycle. In the early stages of a bull market, you tend to see strength in gold first. The money then rolls into silver as people become more confident.

For example, from 2001 to late 2003, as gold made its way from $250 to $400, silver struggled to get above $5 an ounce. Silver only made its 2001 bear market low in November, some six months after gold had started creeping up from its low the previous April. Gold was also faster out of the blocks following the crash of 2008.

So I don’t think there’s too much to worry about there.

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