Tuesday, April 3, 2012

Gold Is at a Critical Level

Gold, at $1677, is at a critical technical level.

Since it broke out of its 2008 decline in early 2009, it has nearly doubled.  During this time, it has held above the 200-day moving average price, with the price repeatedly bouncing off that level as the price of bullion rose.  The price of bullion recently broke below the 200-day level, however, and is struggling to regain its place above the 200-day line.

So is gold's bull market of more than a decade at risk?  On a fundamental basis, the secular case remains strong.  Central banks in the developed economies continue to maintain short-term interest rates near zero.  With the typical real short-term interest rate (after inflation) significantly negative, the environment remains favorable for gold.  Going back more than 40 years, when the real short-term rate has been negative, the annualized return on gold has been more than 20%.

In addition, the sentiment case for gold is positive.  Measures of market sentiment toward gold indicate extraordinary pessimism, which has coincided with annualized returns on gold of more than 20% going back nearly 20 years.  And commercial market participants (the "smart money") are increasingly optimistic--another positive sign for the price of gold.

In sum, for those who own no gold, I suggest buying at current levels.

Steve Lehman

Gold:  $1,677

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