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Gold reached a 15-year peak in the last quarter, retesting the early high this year before retreating to a six month low. The collapse has been so severe that many gold stocks broke their 200-day moving averages prompting technicians and pundits to declare gold's bull market over. Wrong.
Not only, has America's debt load crushed the US economy, but the attendant stimulus is finally showing up in higher rates of inflation. The pick up in inflation has been based on too little supply and too much demand exacerbated by geopolitical events. And China's need to build infrastructure has required much more natural resources.
Against this background, gold will rebound underpinned by dehedging, growing concern that inflation will accelerate, higher oil prices and yes, a lower US dollar. The US dollar has enjoyed a "dead cat" bounce within a clearly defined downtrend. Chronic American twin deficits will keep the dollar relatively weak against other currencies (and gold) while fundamentals such as dehedging, investor demand and $40 a barrel oil prices will underpin gold prices. The ramifications of a China-centric world together with the seachange in the low interest landscape will further underpin gold prices.
Gold is an effective hedge and investors would be wise to rebuild positions before the next gold rush to $510 an ounce.
My BIG question: When will the BIG downtrend line be broken?
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