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Fear Flames Gold's Rush to a Four-Month High

28 February 2014 in Trading Ideas

Now that the Winter Olympics have concluded, there’s little reason to continue propping up the spirit of global cooperation and brotherhood.

And as most gold investors might tell you, the polar opposite isn’t always a bad thing.

The price of the yellow metal rose to a 16-week high earlier this week, as global flareups combined with several data points that elicited uncertainty about a sustainable economic recovery.

In addition, the Precious Metals motif, where gold-mining stocks have an 85% weight, has gained 11.5% in the past month. The S&P 500 is up 3.8% in that period.

Over the past 12 months, the motif is off 30.7%. The S&P is up 25.9%.

Fear, of course, is often good for precious-metal prices because investors believe that gold and silver will retain more of their value while other assets begin to slump.

One of those assets in the recent spotlight is Ukranian sovereign debt, the safety of which has looked to be on shaky ground given the country’s president practically sprinting out of the country, along with the video of Ukranian residents walking through the president’s abandoned mansion and upscale belongings.1

While nothing as startling was happening on US soil, our version of fear had its own impact. Earlier in the week, the Conference Board said its consumer confidence index fell in February, as signs of a US economic slowdown have multiplied in recent weeks, with both manufacturing and employment numbers failing to meet expectations.

 

Peter Hug, director of the precious-metals at Montreal’s Kitco Metals, told the Wall Street Journal, the recent spate of weak US economic data has “reinforced the notion that while the Federal Reserve will likely continue cutting its economic stimulus, it is nowhere near raising interest rates.”

Hug also noted that, while this underlying fear has certainly not translated into the performance of US equities, it does have some investors using gold to hedge their bets as the major indices approach all-time highs.

“There is some uneasiness about the economy and the stock market going so high,” Hug said, “and people are using gold as a safety valve.”

Gold prices are now up about 11% in 2014, but as Mark Hulbert recently highlighted in Barron’s, the metal’s 38% price slump that took place over 27 months from its September 2011 high, exhibited several mini-rallies of about 10%.2

For investors, one question to determine is whether fear is the default theme for the foreseeable future.

1Ira Iosebashvili, “Gold Futures Rise to 16-Week High,” WSJ.com, Feb. 25, 2014.

2Mark Hulbert, “Gold Is Up 12%: Has a New Bull Market Begun?”, Barrons.com, Feb. 25, 2014.

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