Gold bears should watch out for “warning signs”

Gold bears should take note. The ride may be slowing, but it’s not over yet — so says the head of metals analysis at Thomson Reuters GFMS.

There haven’t been a lot of headlines focusing on gold this year, but prices for the yellow metal have continued climbing quietly in the background. The price of spot gold’s up more than 6 percent since the start of the year from roughly $1,550 an ounce to nearly $1,650 an ounce.

Blame it on the subtle hints of an economic recovery in the U.S., but interest in gold seems to be waning. For some, that’s a sign to sell the yellow metal. To us, it’s yet another great buying opportunity. Even the head of metals analysis at Thomson Reuters GFMS, Philip Klapwijk, has sounded the alarm, warning investors not to abandon gold just yet.

He argues gold’s startlingly cheap when comparing it against inflation-adjusted spot prices from the 1980s. Back then, the gold price averaged $1,678 in today’s money. That’s just $30 more than the price of gold today, and the economic picture is far murkier now than it was even in 80s.

“This can be seen as a warning note if you are on the bearish side of the market,” Klapwijk told MineWeb earlier this week. “For those on the bullish side of things, however, the high point that year was over $2,200, which is rather far away from current levels.”

Klapwijk identifies three components that will drive the gold price moving forward: 1) the price of gold itself (not just in nominal terms but when compared against other assets, too); 2) the performance of the dollar; and 3) monetary policy.

Speculation’s running rampant right now on whether the Federal Reserve’s planning a third round of monetary easing. If that happens, the price of the dollar will likely fall and gold could climb higher. It’s not just the U.S. that investors are watching for hints of future quantitative easing, though: Europe’s debt woes are far from over, and that means we’re going to continue to see interest rates that produce negative returns when factoring in inflation.

Gold bears should take note. The ride may be slowing, but it’s not over yet. As Klapwijk pointed out in the interview with MineWeb, it’s remarkable how few mainstream money managers have actually invested in precious metals. Until we see that, and, perhaps, serious talk about the emergence of a new, non-fiat currency, gold’s going to be a tough asset to beat.

Fred Marion is the author of a brand new book on investing in gold and silver mining stocks: The Top 500 Gold and Silver Mining Stocks.

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