Gold did very well this past August on problems over the S&P downgrade of the US debt, Eurozone problems, and concerns over slow growth all over the world. Since none of these problems have gone away, many are expecting gold to continue it's climb towards the $2,000 this month.
Sep. 6, 2011, 11:49 PM
We discussed the reasons last month why gold would go to $2,000 an ounce by the end of August. That did not happen, and fell well short of that level, closing at roughly $1,830 an ounce. Still, gold had a spectacular month, gaining 12% during August, thanks in part to worries over the S&P downgrade of U.S. debt, Eurozone problems, and concerns over slowing growth around the world.
None of those problems have gone away, they have just been pushed out a few weeks, as there is talk that the Federal Reserve is going to do a third round of quantitative easing to help boost employment (aka boost the S&P 500). Fortunately or unfortunately depending upon your perspective, it looks as if a third round of quantitative easing will not been seen by the equities market as favorable, and will only boost commodities, namely precious metals.
During the month of August, we saw gold run up to over $1,900 an ounce, then proceed to plunge to around $1,730 an ounce, as all the hot money and those who rushed in during the month to get burned. That does not mean the trend is over, as evidenced by this chart. The uptrend is still intact, despite that bit of volatility we saw towards the latter part of the month.
In recent days, gold has been consolidating for a larger move: either higher or lower. Considering the fact that none of those problems were resolved (S&P did downgrade U.S. debt, so I guess this problem was solved, albeit negatively) and we have more concerns coming in September, the logical move is higher. We are also starting to move into the holiday buying season, which tends to push prices higher. In India, gold is considered a big gift, and gold prices generally rise as we get towards the end of the year.
There is still a crisis of confidence around the world, although it has calmed down somewhat. There is also concern that as the third quarter comes to a close, we will see earnings reports for a lot of companies be revised down, and money has to go somewhere.
We saw what happened during August when you get a crisis of confidence, money all piles into one place: precious metals, particularly, gold. Gold jumped 12% during the month. If the Fed does decide to enact "QE3" in September, we could see $2,000 an ounce by the meeting, or perhaps slightly after. The U.S. dollar will continue to nosedive, and precious metals will be the beneficiaries.
Greece is still a mess, and whether the country gets bailed out or not changes by the day. That does not inspire confidence. In fact, it saps it. Italy is a disaster of epic proportions, and there is a vote in September to increase the European Financial Stability Fund. Getting the fund increased is going to be incredibly hard to do, which should sap confidence even more. In short, Europe is very ugly, and does not look any better than it did just a few short weeks ago.
When you have a crisis of confidence, everyone heads for the exit. The only door that is open? Gold.
$2,000 an ounce is closer than you think. Wake me up when September ends.
Traders who believe that September will be even more volatile than August might want to consider the following trades:
-Buying the gold miners has not proved as profitable as buying gold ETFs. Traders may want to consider SPDR Gold Trust ETF, which tracks the price of gold, or PowerShares DB Gold Double Long ETN.
-Traders may also move into silver, which should move higher as gold does. Consider iShares Silver Trust ETF or ProShares Ultra Silver ETF.
Traders who believe investor confidence will come back sooner rather than later may consider alternate positions:
-If confidence comes back from some outside force, equities could soar. Baidu, Amazon, Apple etc. all could soar from these levels.
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