Gold Update: 19th May 2014

There aren't many asset classes that offer solid long term return potential in the current climate. Equities have doubled over the past five years and are now expensive relative to historic norms; bonds have been in a 30+ year bull market and yields are trading at multi-decade lows; property has been quite a volatile asset class in recent times but has also recovered during the most recent economic cycle. Gold is one of the few asset classes today that remains attractively priced. 

Following a 13 year epic bull run, gold had a decidedly less bullish 2013, falling over 30% in euro terms. Too many got too excited about the precious metal and the gold bull market was ruthless in shaking off the latecomers to the party. We have had 18 months of declining gold prices now and sentiment has reset. Everyone is now bearish on the metal with many market strategists calling for $1,000 gold or less. 

 

Despite the barrage of negative commentary, the outlook for precious metals has become much more constructive in recent months. There appears to be a solid bid under the gold market at $1,280. Successive attempts to date to drive gold prices lower have been rebuffed. Gold lease rates have also turned negative, a signal of stress in the market. Possibly the best 'tell'  of all is that the gold mining companies have stopped declining. The two gold mining ETF's that track the major mining companies (GDX) and the junior miners (GDXJ) are build strong bases above their recent lows. 

It is still too early to call for a resumption of the gold bull market; we would need to see a solid close above $1,525 for that. However, I am getting much more positive now on the outlook for precious metals, after a bear market that has lasted nearly three years.