As of March 9, the bullion was at $1,320.60 per troy ounce on the London Market, a $8.6 per ounce jump year-to-date and well above the 2017 average price of $1,257.12 per troy ounce.
If the yellow metal had been positively correlated with the U.S. dollar, we would have witnessed a rising U.S. currency, as well. But things didn’t go that way.
When gold is charted with Gold Futures, there is no need to measure the degree to which the two securities move in relation to each other in order to prove the existence of a high positive correlation between the U.S. dollar and the commodity.:
Source: Investing.com
A weakening dollar inevitably favors European investors who traditionally have a preference for gold hoarding since the bullion is priced in U.S. dollars So, for the bullion there will still be room for appreciation as long as the dollar declines.
Of course, a low currency, supported by the Trump Administration as a way to boost the price of U.S. exports, is not positive for those people who went cash a month ago. A growth in wages and the idea of iinflation spooked the U.S. equity markets.
Investors did not have the option of staying out of the game until the dollar showed signs of recovery. In fact, the dominant sentiment in the U.S. equity markets, which led to a correction and a spike in volatility, has been overturned over the recent trading weeks.
With a value of approximately 1.8, the slope of the trend line computed over the period from March 2017 to the date before the market correction was practically the same as the slope of the trend line that was computed from March 2017 to date.
Source: Investing.com
If a low dollar is positive to the bullion, another way to allocate cash is to buy shares of the U.S. publicly traded gold producers that are trading at their lowest over the last 12 months of trading.
The Van Eck Vectors Gold, which is the most followed index that represents the gold stock industry, is currently trading below the 200, 100 and 50-SMA lines. With a current share price of $21.57, the index is only a few cents above the 52-week low of $20.84. The 52-week high is $25.58 per share.
Source: Yahoo Finance
The World Gold Council in its January report on global gold demand anticipates a low real interest rate environment for 2018. This is yet another reason to gan exposure directly to gold stocks or through gold-backed exchange-traded funds.
Investments in fixed income securities won’t be an option. Contrary to tighter monetary policies, which will be endorsed by the U.S. Federal Reserve Bank and the central banks of other countries, high returns on government bonds are likely to decrease.
Therefore, I expect a general uptrend in the market value of U.S. listed gold mining stocks In upcoming months, these stocks, boosted by a rising commodity, will tend to exceed predictions on revenues and profits.
Stock in the world's largest gold producer Barrick Gold Corp (ABX, Financial) can be purchased at a 40 to 45% discount compared to its 52-week high of $11.82 per share, I also suggest not to lose track of mid-tier gold producers, such as Iamgold Corporation (IAG, Financial).
Source: Yahoo Finance
These smaller gold producers have proved to outperform the industry when the bullion surpassed a certain price level per troy ounce.
Source: Kitco.com
These are the cases during a generous portion of the gold bull market period (April 2009 – Summer 2012), and for a 10 out of the trailing 12 months when the bullion traded above $1,260 per troy ounce.
(Disclosure: I have no positions in any security mentioned in this article.)
