Points towards an imminent dollar decline
The strong upward momentum in the movement of gold over the last few days in my view is a very significant event whose importance goes much beyond just its own price movement. The movement of gold prices above the level of USD 970 per pound has now begun a technical formation which over the period of the next two years could see gold prices rallying to a level of USD 1200 to 1300. In my view the current gold price movement conveys two very important points –
An imminent dollar decline – From being in the camp where I believed that we would see a bounce back in the value of the US Dollar before it finally falls sharply, the movement of Gold prices over the last three days points towards the fact that a lot of market participants are now positioning themselves for an fall in the value of the US Dollar. The correlation of US Dollar movement to gold prices has been pretty strong at most points of time. Sometimes it’s the currency that leads and sometimes it’s gold.
A greater confidence in economic recovery – The movement of gold prices also reflects growing confidence in global economic recovery and the fact that investors now are also focusing on the fact that finally this recovery will lead to a pick up in inflation and an asset allocation to gold might be a good hedge against that inflation pick up.
There might be a shift from industrial to precious metals in the near term – We have seen most industrial metals rally significantly from the beginning of the year. Copper, Aluminum, Zinc etc. all have seen very sharp rallies. I believe there might also be a diversification play on right now where some amount of money from commodity funds getting redeployed into precious metals.
Greater money flow into emerging markets – As the dollar declines, the flow of money into Emerging Markets should accelerate. I believe lot of money was sitting on the sidelines mainly due to the fact that most people were betting on a dollar recovery subsequent to the decline in that currencies value over the last few months. However as more people get convinced that this is not to be this money will start flowing in.
If we go back to the start of the last equity market rally back in the year 2003, the price of gold bottomed out much before the equity markets bottomed. A similar phenomenon has been observed this time where gold prices bottomed out in October 2008 itself whereas equity markets globally bottomed out only in March 2009. I was skeptical about the short term direction of the markets mainly due to the fact that gold was not moving up despite all news of economic revival, rising commodity prices (which have inflationary implications), high government deficits and monetization (which reduces the value of paper money).
I believe things are now falling into place for the expected year end rally which should target around 11,000 levels for the Dow Jones Index in the US and around 5,300 to 5,400 for the NIFTY.
October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February. ~Mark Twain