Saturday, April 26, 2014

Gold searching for a fear catalyst

Our theme in recent reports has been the correlation between investor anxiety and gold demand.  For most of the last 13+ years, gold has benefited from what has been a near-constant climate of uncertainty.  The post 9/11 and post credit crisis years were indeed bountiful ones for the precious metals.  They served to underscore the attractiveness of gold as a safe haven investment.

Without another fear catalyst, however, gold is unlikely to regain investors’ attention in a meaningful way.  What the next catalyst might be is anyone’s guess.  Whether it takes the form of geopolitical turmoil, a financial crisis in the emerging markets or an economic slowdown, the next “black swan” event is exactly what gold needs to blast off into a new bull market.

The big question of course is when the next fear climate will emerge.  While this is ultimately a matter of conjecture, the most likely time frame for a flare-up of financial market tension is the June-September period.  It’s then that the final descent of the long-term deflationary cycle will be underway.  This is the same series of cycles that was instrumental in galvanizing the 2001-2011 bull market for gold. 

Gold is sensitive to both ends of the economic long wave of inflation/deflation.  It performs best during the final inflationary portion of the cycle as well as the final deflationary end of the cycle.  These two ends correspond to approximately the 1970s and the last decade, respectively.  Thus gold has still a chance of feeding off the last vestiges of the long wave deflationary currents between now and this fall. 

[Excerpted from the Apr. 22 issue of Gold & Silver Stock Report