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Why This Isn't a Gold Bubble


The commodity continues to be in a sweet spot.

In the September article Will Gold Stay in a Sweet Spot? I laid out the case for gold trading as a cyclical. I explained that gold would likely continue to rise as long as global growth continued to surprise on the upside. Increased jewelry demand tied to increased discretionary income and increased fears of demand-pull inflation were two key factors cited.

By this reckoning, gold should still be in a sweet spot. Global growth has been surprising on the upside everywhere.

However, as I and others on Minyanville's Buzz & Banter have pointed out, gold and gold stocks have pulled back very significantly and now are threatening critical levels. Interestingly in this regard, as I have predicted, gold has behaved as a cyclical. It has pulled back in line with economically sensitive markets, sectors, and stocks.

So what should we make of the pullback in gold? Is it a buyable pullback, or could it be signaling, along with other cyclicals, a faltering in global growth prospects?

I have nothing at stake in the gold game at present. But here is my thinking:

George Soros notwithstanding, I don't think that gold can yet be described as a "bubble". One could look at several factors, but to cite one, global production costs for gold are probably somewhere in the neighborhood of $800.

At current prices, gold may be a bit pricey, but not in a bubble. Thus, I don't see much opportunity on either the short or long side at these prices.

However, if the US and Europe can maintain at least modestly positive GDP growth, this will be very bullish for emerging markets. And since the vast bulk of global gold demand originates from emerging nations, this is very bullish for gold. Positive growth in emerging markets will also put pressure on resource prices, which feed into inflation -- another positive for gold.

Thus, from where I sit, gold continues to be in a sweet spot. Strong global growth fuels strong physical demand for jewelry and industrial uses, plus strong demand from speculators betting on inflation.

Thus, a further pullback in gold and/or gold stocks from current levels could get me interested. Such a pullback, in my view, would likely be sparked by mounting fears regarding the consequences for global growth of the turn in the global interest rate cycle.

As I pointed out on the Buzz today. Historically, such pullbacks in economically sensitive markets, sectors, and stocks should be bought, not sold. The reason: Growth trumps rates.
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