Gold's Second-Half Performance Dependent on QE


"We expect politicians and central bankers to turn to quantitative easing as their 'get out of jail' card and this will propel gold to the $2,000/oz level before the end of the year."


Gold prices jumped last week when the unemployment rate was reported unchanged at 8.2%. The consensus for the May payroll figures was 150,000, however, the actual number was 69,000 and it was announced alongside downward revisions for the March and April figures. These poor jobs numbers have been interpreted as increasing the pressure on the Federal Reserve to take action in the form of some kind of financial stimulus, such as the creation of more cash. The continuing debasement of the dollar adds upward pressure on gold and hence the move from $1550/oz to today's price of $1621/oz. The next meeting of the Federal Reserve is scheduled for June 1920, 2012, and no doubt the investment community will be listening for at least a hint of some form of stimulus from Ben Bernanke.

On the other side of the pond the PIIGS continue to implode with Spanish banks taking center stage as the Greeks head into another election. The Greeks would like to remain in the Eurozone without the austerity that goes with it; fat chance, Greece is toast. Some reports suggest that Spain requires $100B for bank recapitalization. As we see it these figures appear to grow by the day making it difficult to get a real handle on the size of this problem. No doubt the patience of the Germans will tested to the maximum.

It is a very sad and indeed dire situation that we are grappling with and so we turned to gold and silver as a form of protection as we just cannot see the light at the end of this tunnel.

Taking a quick look at the above chart we can see that the RSI is heading north and has room to go higher. Another positive sign is the MACD, which has experienced a positive crossover at a low level suggesting that gold can still rise further from this point. On the negative side the cross of death, the 50dma crossing over the 200dma in a downward direction, had a negative effect on gold prices for a while, however the poor jobs numbers have given gold prices a boost.

Considering the above mentioned difficulties, we expect politicians and central bankers to turn to quantitative easing as their 'get out of jail' card and this will propel gold to the $2000/oz level before the end of the year.

Based on the above premise we will look to buy physical gold and silver, the associated producers and a few well thought out options trades, as the foundations of our investment strategy. Conventional wisdom suggests that a continuous program of purchasing the physical metal on a monthly basis is a good way to build your stash and we agree with that approach. The acquisition of mining stocks is indeed a precarious one and we can only suggest that your funds are concentrated on say a dozen stocks as you can get to know their characteristics and behavior patterns very well. The quality producers will outperform the market and the mining indices but there many whose return on investment will be somewhat lacking. As for options trading, this is an area which requires an awful lot of work as you not only have to get the direction of the underlying asset right, you also have to time your trades with considerable dexterity.

However we will leave you with this tantalizing thought:
If we have identified the direction of the metals correctly and should the stocks return to outperforming the metal and we can identify the stocks that will outperform the mining sector and we can select the options strategy that will maximum the return on these trades, then the profits should be mouth watering.

Enough said, it's heads down and do the work.

Bob Kirtley

Disclaimer: or makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level or risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is not a guide nor guarantee of future success.

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