Gold Rebounds: A Sign of Things to Come?

Gold Rebounds:  A Sign of Things to Come?

One of the biggest stories in financial markets last year was the massive decline in gold prices.  To be sure, the drop in valuations is something that has not been seen in a very long time:  2013 marked the first annual drop in gold prices in 13 years.  For some, this was a clear sign that it was time to close out positions and run for the exits.  For others, this means a buying opportunity is now firmly in place, as gold is now cheaper (relative to historical averages) that it has been in a long time.  But the real question is this:  Are we ready for a turning point after the bear trend?

Signs of a Bottom

This year, we have already seen signs of a turnaround.  “In the early part of 2014, we have seen a significant gains in gold markets,” said Tony Davis of AtlantaGoldandCoin.com.  “Prices reversed strongly after hitting their lows at $1,180 per ounce and so far we have seen limited signs of weakness.”  This bodes well for gold markets going forward, as the market continues to revise its expectation for how sentiment will unfold in coming months.  Into the end of last year, most of the attention was focused on prospects for reductions in central bank stimulus.  Dovish outlooks at several central banks promoted conditions of monetary stimulus but this could start to changes as the economic continues to stabilize this year, and this has led to gold predictions that are more significantly bullish than what has been seen over the last few quarters.

Last year, all eyes were on the Fed and its major market counterparts (the ECB, the BoJ) as historic stimulus programs were seen supporting the global economic.  But as “tapering” programs continue, stock markets are likely to start coming under pressure once again.  This will likely leave investors as a loss with respect to where their money should be moved.  All of this creates an argument for buying commodities like gold and silver while they are still trading at their relatively low levels.  Gold prices have already shown four consecutive weeks of gains, which is the best winning streak since August and an early indication that the bear market in precious metals might be coming to an end.  

Recent Activity

From a fundamental perspective, a sustainable rally in metals prices will likely require a majority market move toward risk aversion, as safe haven buying is traditionally what brings investors back into precious metals.  But we will also need to see retail demand, as well (for items like gold coins, gold bars, or jewelry items).  Recent trends in emerging markets have shown just this, with China now seen surpassing India in terms of gold imports.  But demand increases can be seen in developed markets as well.  The US mint has already sold more than 69,000 ounces worth of American Eagle gold coins this month.  

This is a strong increase from the 56,000 ounces that were sold during the entire month of December.  January has also been the strongest month since the 70,000 ounces that were sold in May 2013.  We are currently on pace to surpass this mark, however, so it is clear that rising demand can be seen in most areas of the globe.  This is not entirely surprising, given the bargain prices we are now seeing from the metal, so if these types of trends continue it is becoming increasingly likely that 2014 will turn positive after the declines seen last year.  

Technical Analysis

But things are looking better from a technical analysis perspective, as well.  Since markets managed to make a strong bounce off of the lows at 1180, we have now taken out the downtrend line established last August, and the next bull target rests at 1340 resistance overhead.