Gold bullion prices have begun to skyrocket higher in recent weeks. We have had one of the biggest upside moves in gold than we have seen in years. Many people are asking why such a move now? Then again, it seems that all is rosy in the economy. GDP has been good, houses are selling, the stock market is making new highs right? All of this is true, however not all is as rosy as it seems. With that said, let's explore the many underlying factors that are attributed to this substantial move to the upside.
From a technical perspective, gold was long overdue for a breakout to the upside. Over the last 4-5 years, gold has continued to make higher lows, or in other words every time gold retreated from a run to the upside, the bottom that was made had consistently been higher than the prior bottom. This is an extremely bullish sign for gold. Furthermore, in the two year chart in gold, a reverse head and shoulders pattern formed. A head and shoulders pattern in gold would usually signal that it was topping out and that a major reversal in trend was occurring, with significant downside risk possible if the neckline support was broken. However, what formed in the two year charts was a reverse head and shoulders pattern. As you can guess, that is a very bullish sign for gold. A breakout above the neckline would signal a major rally in gold and potentially a $200 or more move to the upside. As we saw, gold broke above and closed above the neckline on tremendous volume, thus confirming a breakout to the upside and reversal of a downtrend. Additionally, looking at gold from a longer term perspective, it looks as if the latest pullback in gold, that was experienced from around $1,900 an ounce to as low as $1,040, was a long term healthy correction. When looking at the 20 year chart in gold, we had an impressive run and a pull back was necessary in order to keep the longer term bull market in gold in tact.
Lower Interest Rates:
At the recent federal reserve meeting, boards members signaled that they would be accommodating with their policy. In other words, the federal reserve would cut interest rates if the economy continued to decelerate. Many investors interpreted this as one thing, interest rates would eventually be cut once again and make their way back to zero. In turn, a loose money policy or low interest rates are typically associated with higher gold prices or increased demand as other interest bearing investments are no longer as attractive.
Inverted Yield Curve:
Many months ago, the U.S. yield curve went negative, or in layman terms, short term interest rates were higher than long term rates. Specifically, the 2 year, 5 year, and ten year yields all became inverted in respect to the 3 month yield. Over the last 50 years or so, any time the yield curve became inverted a recession was imminent or followed in the coming months or years. Many see an opportunity in gold as a hedge for a slowing economy or one that is going into recession. Furthermore, many investors expect the government to increase stimulus spending and the federal reserve to maintain loose money policy in order to stem a future crisis.
The above reasons have caused a lot of buzz in the precious metals industry and has resulted in an increase in demand for gold and silver bullion products. Only time will tell what is to come next.
*These are solely the opinions of Bullion Shark, LLC and are not intended to be used as investment advice. Please consult a financial adviser before investing.