Inside Track: Is the Gold Trade on or off?

It’s no secret that gold prices are under pressure and have been for a few months. From their lofty levels close to $2,000 per ounce a couple of years ago, prices have collapsed by some 40% and are only now showing signs of recovery.

What gives? Well there are two sides to the story. Gold prices reflect underlying lack of confidence in the global economic system and they are fairly easy to manipulate since the market for gold is quite small in terms of daily trading value. It can be measured in the billions on a good day versus hundreds of billions for stocks and in trillions for the currency markets.

Earlier this year when gold fell from $1,700 per ounce to less than $1,200 per ounce, much of the destruction and carnage occurred over just a few trading days as more gold was traded in just a few days than is normal for an entire quarter.

The only entities that have that much gold to sell are the Governments of Central Banks or hedge funds looking to sell gold that they don’t have in order to cause a panic, which will allow them to buy the metal at lower prices to replace the gold they sold short.

In the past the Government argument would be more palatable as they are wont to play with prices to reflect their policy direction. If gold falls, it means the economies are doing well; especially the US dollar, which is what gold is priced in. That shock in gold prices could indicate that there are less risks in the financial markets which would bolster consumer confidence and lead to more spending – what’s not to like about that?

The problem is that is doesn’t address the fundamental issues such as continuous money printing and debt accumulation. It masks the issue, but only temporarily.

Today, the governments of the world are not the only players with power. That power is becoming concentrated in a select group of money managers who control vast amounts of capital. They are using the capital to corner markets and stocks; making them behave in whatever manner they want, up or down. As an investor you have to understand this and know that these intensely volatile price movements are nothing but short bursts of manipulation. In other words, if you’re buying gold or a certain stock based on a long-term outlook, don’t get burned in the short term or “scared out” of your position or thinking.

The profit opportunity today lays in the gold mining sector, in the actual mining stocks like GoldCorp (GG), Newmont (NEM), Yamana (AUY) and for more speculative investors, companies like Kinross (KGC) and IamGold (IAG). Historically these stocks and others that make up the XAU Index of mining shares traded in a certain range indicating when it is time to sell or buy.

This range is calculated by dividing the price of gold by the value of the Index. If that number was low, below 4 or 5, it indicated that the market was overheated and it was time to sell mining shares. Now that number is over 13, a level at which history has shown that mining shares would rally sharply.

And, for the first time in years, I have been seeing mining company insiders starting to buys shares of their own stocks. I’ll share those companies with you next time. Gold and especially gold shares maybe providing you with a major buying opportunity, despite what the hedge funds and governments would like you to believe!

To your wealth,

Banker X.

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