Gold: Where Do We Go From Here?

Source: Thinkstock

Source: Thinkstock

After a dismal 2013, the gold price has rebounded nicely in 2014. So far, the gold price is up nearly 9 percent for the year at about $1,315/ounce. Still, the price hasn’t gone up in a straight line. After spiking fairly quickly to nearly $1,400/ounce, people were convinced that gold prices were going to rocket higher given the rising tension between Russia and the U.S. over the Ukraine. But since then, the gold price has fallen as a contrarian trader would have predicted. Gold ended up giving up most of its gains for the year when it fell back to $1,285/ounce.

Now the price has rebounded. We have reclaimed the $1,300/ounce level. Furthermore, it has reclaimed the 200-day moving average, which is a bullish technical indicator. It tells traders that investors are willing to pay more than the average price over the past several months, and that the price could end up moving even higher. We have also seen another bullish indicator — the golden cross. This is when the 50-day moving average trades higher than the 200-day moving average. This tells traders that there is near-term momentum behind the upward price movement that wasn’t there before.

These bullish indicators could attract speculators into the market, and this could send gold higher in the near-term. Nevertheless, there is still a lot of bearishness, and there are investors who are holding gold they bought when the price was higher. They were bullish then, but not because they understood the bullish fundamentals. They were bullish because prices were moving higher. Now that this thesis is working against them, I suspect that they will want to exit the market. Thus, I think that a rising price could attract more selling in the near-term. If the higher price is reached as speculators enter the market, and if this ends up enticing disgruntled investors to exit the market, we can see the speculators quickly exit the market and even take short positions. This can drive the price lower to a point where value investors are once again willing to step up and buy.

That isn’t to say that there isn’t excellent value in gold now. Gold has done an excellent job of protecting investors from inflation so far in the 21st century. The seeds of more inflation are currently being planted by the Federal Reserve and by other central banks that are increasing their monetary bases. While inflation has been rather tepid (although it hasn’t been nonexistent), the fact that the monetary base is rising rapidly at over 1 percent per month will inevitably engender inflation, and this will create demand for gold as well as other precious metals such as silver platinum, palladium, and related equities.

It is difficult to say when this will happen. For this reason, I think that investors with no exposure to gold and to other precious metals should consider starting a position now. We could see a gold price below $1,315/ounce, but in the long-term the upside potential far outweighs the downside risk. The easiest way to do this is to take a position in an ETF. While most investors are familiar with the SPDR Gold Trust, a preferable alternative for long-term investors is the Sprott Physical Gold Trust (NYSEARCA:PHYS), which has a lower expense ratio and better tax treatment assuming you hold it for longer than 1 year.

Investors should also consider shares in royalty and streaming companies. These companies make deals with mining companies to buy an agreed upon amount of gold at a specific price (often $0) in exchange for an upfront payment. Royalty and streaming companies are excellent businesses, and the fact that their stocks have outperformed the major averages such as the S&P 500, the price of gold, and the prices of gold miners, speaks to this excellence. Royalty and streaming companies have low, fixed costs, and it also has very predictable cash-flow streams. Furthermore, it still offers leverage to the gold price, and the larger ones pay dividends. In fact, the two largest gold royalty and streaming companies — Franco Nevada (FNV) and Royal Gold (NASDAQ:RGLD) actually raised their dividends this year despite the weak gold market.

Investors like myself who already have exposure to the gold market have less of a sense of urgency. We can try to time the market, and if we fail to add to our positions, it matters less because we already have exposure. Given that I think the gold price could rise briefly but then fall again, I am waiting.

Disclosure: Ben Kramer-Miller owns gold coins, shares in select gold mining companies, and shares in Royal Gold.

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