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Striking Gold Bullion

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Only halfway through secular bull market, the risk/return profile is outstanding.

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Is gold bullion coming back to life? Should one read anything into the rise of 6.2% (+$56) since the yellow metal's low of early July? When it comes to gold bullion and gold stocks, I need to confess I started my investment career in 1984 as none other than a mining analyst. Ever since those days of calculating net present values on my trusted HP 12C, I've been intrigued by the shenanigans of the yellow metal and related stocks. And I've also learned over the years that one should never underestimate the ability of the gold price to surprise when least expected.

Admittedly, part of the improvement in the gold price can be ascribed to the fading US greenback, which declined by 3.9% over the same period. I always have more faith in gold's rallies when they're not only a reflection of US dollar weakness, but gold is also appreciating in most currencies. This serves as an indication of increased investment demand and is a phenomenon one should keep an eye on, as gold might just have started moving independently of the dollar over the past few days.

Considering the fundamental outlook for gold, a very comprehensive report was recently published by Austria's Erste Group. The analysts list the positive and negative influences below, leading them to conclude that gold is only halfway through a secular bull market and offers an outstanding risk/return profile.

Negative factors:

1. Clearly falling jewelery demand.

2. Recessions are basically not a good environment for the gold price (the gold price gets stimulated at a later stage by the measures taken during the recession).

3.
Gold tends to be held as asset and cash of last resort, which means it's liquidated in extreme financial situations. Given that more than 70% of jewelery is bought on the Indian subcontinent, the supply of recycled gold might continue to rise.

4. De-hedging is coming to an end.

5. The futures positions (CoT) would suggest a short-term correction.

Positive aspects:

1. The worldwide reflationary policy will continue for a while.

2. Global USD reserves are excessive, and the need to diversify is enormous.

3. De facto zero-interest policy in USA, Japan, and Europe.

4. Central banks have changed their attitude towards gold.

5. Supply still in long-term downward trend.

6. Investment demand will remain high; Wall Street has discovered gold.

7. Commodity cycle has a long way to go.

8. Geopolitical environment remains fragile.

9. China will increase its gold reserves.

Gold's technical picture is certainly looking up. This is explained by Adam Hewison of INO.com who prepared a short analysis of gold's most likely direction. (The analysis was done on Tuesday, but is still as relevant today as it was then.)

Click here to access the video presentation.

Seasonally, September also seems to be a good month for gold, with an average gain of 2.6% for the month since 1970.



I'm bullish on gold in the medium term especially, as I believe the vast money-printing by central banks could set off strong inflation pressures down the road. I won't be surprised to see bullion passing the infamous $1,000 resistance level over the next few weeks -- a question of fifth-time lucky -- and I'll be inclined to add bullion to my portfolio on pullbacks
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No positions in stocks mentioned.
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