Is Gold Back?

It wasn't so long ago that some of the more famous investor gurus were shrugging off gold as nothing more than shiny trinkets with no investment value. They were wrong. This safe haven is back, the recovery is clear, and there have been some very big changes of heart.

The biggest gold producers in the world have seen their share prices double this year. Not only are gold prices soaring, but producers are cutting costs and slimming down debt as they pave the way for gold to return to the top of the favored commodities list.

Finding the True Measure of Gold

Many investors still think about gold as if it were money.  Economists identify three functions of money: store of value, means of exchange, and a unit of account.  It can be a store of value, but the price fluctuates compared with other forms of money, or other commodities, like oil or silver.

Some argue that it is a store of value because of the limited supply, but that argument applies to many other goods, including commodities and real estate (which Mark Twain said you have to invest in because they have stopped making it). 

The (Commodities) End is Nigh...or Not

While cyclical challenges remain tough in global commodities, structural realities look more tolerable.  According to conventional wisdom, the challenges of global commodities can be attributed to China’s slowdown and poor growth prospects. Advanced economies are not immune. In the US, just two commodity-related sectors – oil and gas, as well as metals and steel – accounted for more than half of the defaults in 2015.

Gold Soared, but Why?

Not so long ago, gold suffered the most challenging losses since 1999.  According to conventional wisdom, US rate hikes will contribute to its further decline. If that’s the case, why did gold prices soar during the last quarter?

At the turn of 2015, gold was driven by the broad commodity sell-off, especially the drastic plunge of oil prices that was fueled by the stronger dollar, along with concerns over China’s growth deceleration. Yet, the reality is that gold has low correlations with commodities and other asset classes.

Where Oil Goes, So Goes the CRB Index

This Great Graphic, created on Bloomberg, depicts the CRB Index, a basket of commodity prices.  The technical picture has deteriorated, and the price action in the coming sessions is particularly important in determining outlook. 

Technical Indicators Muddy Golden Waters

During a period in which the zero bound no longer is the floor of interest rates, and many central banks continue to ease policy, we have been watching gold a bit closer. 

In early January, we noted that the technical pattern warned of breakout.  Our first objective was $1110-$1135.

In early February, we updated our view with gold trading near $1150. The charts still looked constructive; we suggested a new target near $1200. 

The Barbarous Relic

Keynes and others may have referred to gold as a barbarous relic, but many investors continue to track it.  In early January, we warned that gold appeared to be breaking out of a short-term bottoming pattern.

It had taken out a three-month downtrend line, which we suggested was part of a triangle pattern.  Gold also traced out a double bottom pattern.  The triangle pattern pointed to a move toward $1110 and the double bottom projected to around $1135.  The yellow metal poked through $1157 today and remains near it highs in late turnover.

Latin America's Smooth Economic Ride Jeopardized by Commodity Crisis

Much of Latin America has seen an unusually long period of relative political stability since the early 2000s. With the exception of Cuba, democratically elected governments seem embedded throughout the region. The political rules of the game largely seem to be followed. Indeed, the international outcry following the 2009 coup that removed Honduras' president, Manuel Zelaya, served to reinforce how much Latin American politics had changed since the 1970s, when military dictatorships were the dominant form of government.