Gold is up over 15% this year so far, while the gold stocks (per XAU index) have risen over 50%. But investors are skeptical about this year’s gold rally, and that’s a good thing. For the past several years, we have seen strong rallies in gold and gold stocks early in the year, only to see the market reverse and end the year down. Investors are reluctant to jump on board this year’s rally.
Correction ahead?
There are certainly reasons to think that gold could correct. After all, we have seen a very strong rally, with the strongest February on record; it would be foolhardy to expect that to continue without a pause. The first quarter is seasonally strong, with the April to June period typically soft. Moreover, the speculative net-long positions on the COMEX have increased vastly in recent months, and thus are vulnerable to profit taking.
Gold rally stronger than previous first-quarter rallies
But there are strong reasons for thinking that we have further to go this year.
—interest rates remain very low, with negative rates encompassing over 20% of the world’s GDP, and Fed Head Janet Yellen discussing negative rates in the U.S.
—the dollar seems to have peaked, at least temporarily
—global equity markets are more volatile and less of a one-way street
—sentiment is shifting from historic bear levels; many well-regarded institutional managers are moving into gold and others taking a small hedge position
—the rally is not believed; short interest in major miners and even in the bullion ETFs has risen this year (unlike, say, last year, where the rally was largely short-covering)
—gold is showing great resilience, with each mini-pullback swiftly reversing
—though the dollar correction and stock market pullback in mid-January sparked the gold rally, gold continued to move up in February even against a dollar and stock recovery
—though …read more