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Why Gold is Approaching a Bottom

Gavin Wendt - Mine Life - 10-Oct-2018

Recent months have proven challenging for the gold sector, with trading momentum definitely on the negative side as speculators have sided with the US dollar. These pillars of global financial markets move inversely proportionately to each other – i.e. when one’s rising, the other falls – and vice versa.  

The graphic below represents gold’s price performance over the past six months. 


 


Nevertheless, the key fundamentals with respect to gold at present still ring true and support higher gold prices. But why is this so? 

Well firstly, recent price gyrations are predominantly related to short-term trading positioning, especially as traders have deemed the US dollar as the go-to safe-haven of choice whilst the current trade imbroglio gets resolved. Inflation is already spiking, and trade tariffs and other factors will almost certainly accelerate the inflationary process. Furthermore, US national debt is the elephant in the room and the inconvenient truth that nobody wants to talk about - and the only way it's going to get smaller is if it’s ‘inflated’ away. 


In essence, the recent sell-off is overwhelmingly a transient phenomenon that’s decoupled from any intermediate or long-term fundamentals, which potentially presents a compelling opportunity for investors. 


Let’s remind ourselves about gold’s unique status and why it has been a staple of the world’s economic systems for thousands of years. Gold is simultaneously both a commodity and a financial asset.  


Central banks around the world retain gold as part of their foreign currency reserves. During 2018, as in past years, governments have continued to be net buyers of gold adding to official sector holdings. The two main accumulators of gold are China and Russia, whose gold stocks remain far below those of other leading nations like the USA and countries within the European Union. Whilst the Chinese and Russian governments have done some light buying in the international gold market, the bulk of their reserve accumulation has come from their domestic production. China is the world's leading producer of the yellow metal, whilst Russia has considerable annual output.  


Amongst all of this, I believe there are various factors that could set the stage for a gold price recovery over the coming weeks and months, which I will outline. 


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Disclaimer: Gavin Wendt, who is a director of Mine Life Pty Ltd ACN 140 028 799, compiled this document. It does not constitute investment advice. I wrote this article myself, it expresses my own opinions and I am not receiving compensation for it. In preparing this article, no account was taken of the investment objectives, financial situation and particular needs of any particular person. Investors need to consider, with or without the assistance of a securities adviser, whether the information is appropriate in light of the particular investment needs, objectives and financial circumstances of the investor. Although the information contained in this publication has been obtained from sources considered and believed to be both reliable and accurate, no responsibility is accepted for any opinion expressed or for any error or omission in that information. I have no positions in the stock mentioned and no plans to initiate any positions within the next 72 hours.