So far gold is one of the better performing assets year to date, with the SPDR Gold Trust (NYSEARCA:GLD) trading 7.5 percent higher. This is after we saw a severe bear market in the yellow metal that took prices down from over $1,900/ounce to less than $1,200/ounce.
Thus it should come as no surprise that the gold price is bouncing — even in a downtrend we find short term price appreciations. But is the downtrend over for gold, or is there another leg down?
Gold has been in a very long bull market for the duration of the 21st century. While many claim that it has ended this simply isn’t the case. Gold remains extraordinarily undervalued if we look at many historical metrics. For instance gold is at the lowest price it has been if we compare the value of the U. S. gold stockpile to the Federal Reserve’s monetary base. This means that hypothetically, if the U. S. were to back the dollar with gold, we would have to see a tremendous appreciation in the gold price in order for such a system to function smoothly.
Of course there is little likelihood that the U.S. will back the dollar with gold. However, we are finding more and more that foreigners are less willing to hold dollars and are increasingly swapping these dollars and dollar-denominated assets for gold.
Those that are buying large amounts of gold, however, are extremely patient, and they are more than willing to wait months, or even years, for the price to come to them. This could mean that the downtrend in the gold price has further to go. But then again we saw extremely strong buying from the Chinese at the $1,200/ounce level. Furthermore, the $1,270/ounce level acted as strong resistance prior to its breach a couple months ago. Now we are seeing buyers come in whenever we see downward price action towards that level. Those who are technical analysts know that a price level that was once resistance, once breached, becomes support.