Gold: First Mover Advantage

Frank Holmes

Last week there was a long-awaited uptick for gold. After falling below the 200-day moving average, the yellow metal was stuck for several months, but now bullion has risen above this critically important benchmark.

While gold has not yet regained its all-time high, Stifel Nicolaus' gold-to-crude oil ratio suggests gold climbing to $1,900. According to Stifel's research, the gold-to-oil ratio based on the price of Brent has historically “shown a tendency to run to around 16.5x.” In other words, the price of gold is usually about 16.5 times the price of a barrel of Brent oil. With Brent trading around $116 per barrel last week, the math says that gold could go to $1,900.

The long-term fundamentals for gold stand on solid ground. Last March, Ian McAvity said that the “extreme behavior of major central bankers and the absurd 'risk-on/risk-off' surges of liquidity across all markets fueled by those liquidity injections sloshing around markets rather than reaching any economy is frightening, and the most bullish fuel they could throw at the gold market.” Liquidity keeps flowing today, as central banks continue their massive global easing cycle. In McAvity's opinion, gold price volatility is more a reflection on the US dollar and euro paper and the madness of an asset bubble. “Gold,” he says, “will be the last man standing on the other side of the valley.”

Gold buying by China and India isn't over, despite tepid quarter-end results from the World Gold Council. With gold demand totaling nearly 800 tons from June 2011 to June 2012, China is an avid gold buyer.

As for India, people are buying gold with cash to avoid higher duties, and these cash purchases don’t show up in official recorded data.

In addition to these factors, there is growing demand from central banks. To summarize: “The conclusion for investors is stupefyingly simple. Stay long gold.

source: Gold Eagle