Daily Gains Letter

Bulls vs. Bears: What’s the Best Strategy for Gold?

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Bulls vs. Bears: What’s the Best Strategy for GoldGold bullion has attracted a lot of attention lately from both the bull side and the bear side. The main reasons: the continuous decline in the prices since the yellow metal reached its highs in 2011, and the recent sell-off, which caused more pain to the investors. Will gold go down further? Or is it headed much higher?

The Bull’s Argument

The bulls argue that the sell-off in gold bullion was nothing but panic selling—that the decline was in the futures market or the paper market, but the demand by consumers and central banks remains the same. They argue fundamentals haven’t changed.

As the gold prices plummeted in April, retail investors rushed to buy gold bullion. Consider this: the U.S. Mint reported that in April, it sold 209,000 ounces of gold bullion in coins. (Source: U.S. Mint web site, last accessed May 10, 2013.) In April of 2012, when gold bullion prices were soaring higher, the U.S. Mint only sold 108,000 ounces of gold bullion in coins. (Source: Ibid.)

Similarly, central banks have been continuous buyers of gold bullion. As the bigger central banks around the world are busy printing more money out of thin air—look at the U.S. Federal Reserve and the Bank of Japan—others are looking at gold bullion as an alternative to holding currency in their reserves. Why? Because printing more money devalues the currency.

As a matter of fact, central banks have actually become net buyers of gold bullion, and in 2012; they bought the largest amount in many years.

The Bear’s Argument

The gold bears say that the yellow metal is a good investment when there is inflation. Currently, the situation is the opposite; despite rigorous printing, the inflation is just not there. For example, the producer price index (PPI), considered an early indicator of inflation in the U.S., turned out to be negative in March, registering a decline of 0.7%. (Source: “Producer Price Indexes – March 2013,” Bureau of Labor Statistics web site, April 12, 2013, last accessed May 13, 2013.)

On top of all this, economic conditions are getting better. If the reason not to hold gold bullion is uncertainty, then it’s not there, either. The financial system is much more stable now, corporations are showing profits, jobs are being added, and the stock markets are soaring higher.

Lastly, gold bullion was just a trade and nothing more—it’s over now, and investors should look elsewhere for opportunity.

Solution: look at it with an open mind

Yes, the price of gold bullion has come down—there’s no doubt about it. Investors need to follow the prices and act accordingly. Both bulls and bears have merit for their reasoning, but one of them will eventually be right and the other one will be wrong.

For example, it appears that there is a significant amount of resistance at the $1,550 level on gold bullion prices and support around the $1,320 area. Instead of having a bullish or bearish bias, investors should wait and see how it plays out. A move below the support or above the resistance may just indicate where gold bullion prices are headed next.

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