Is Gold Finally Getting Its Shine Back?

Is Gold Finally Getting Its Shine Back?
Jonathan Hobbs

about 1 year ago2 mins

Gold had a sprint finish last year: it jumped 10% in the fourth quarter, eclipsing its 8% dip from the quarter before. And there are technical and fundamental reasons why it could keep shining this year.

First, the technical: this chart shows the price of an ounce of gold in US dollars, with each red or green bar representing one quarter’s worth of price movement. As you can see, the yellow metal closed last quarter above $1,770 (orange dotted line). That’s a key level: it’s where gold finished the third quarter of 2012 – the highest quarterly closing price of its last major bull market. And with that area now recaptured (after losing it the quarter before), it’s starting to look like a good base from which gold could mount a longer-term bullish assault. Mind you, you’ll want to see that $1,770 level hold for that scenario to remain in play.

Then the fundamental: chart art aside, the macroeconomic case for owning some gold right now is strong. The Federal Reserve (the Fed) has promised to do whatever it takes to bring inflation down to its 2% target – i.e. using interest rate hikes to slow the economy. But there’s a chance those hikes could do too much, putting too many people out of jobs, which might cause the Fed to pause (or even cut) rates before inflation reaches 2%. In other words, the Fed might settle for moderately higher inflation (say, 3%-4%) for longer as the lesser of two evils.

Gold is the world’s oldest inflation hedge, but because it doesn't pay a yield, it tends to be shunned as interest rates rise – just as we saw at times last year. But if interest rates stabilize and inflation is still fairly high, investors will likely favor gold over yield-paying assets like bonds.

If you’re looking to add gold to your portfolio, the SPDR Gold Shares (Ticker: GLD; expense ratio, 0.40%) is its biggest ETF by market size. And if you’re a hardcore gold bug, you can own and store the physical metal through platforms like Bullion Vault.



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