One large fundamental driver of the gold price moving upwards that is overlooked by most pundits is the emerging markets and the burgeoning growth of their business and middle classes. This emerging middle class is the invisible elephant in the room. The sheer size and buying power of this middle class is what is driving the markets for commodities worldwide. As this population class becomes wealthier, they look to preserve their wealth with traditional investments in gold and precious metals. Another ignored factor is that the emerging market buyers of the precious metals are not traders, but instead are long term holders.
Another fundamental change is the attitude of Central Banks. Here is an update about the latest emerging market countries of Mexico, Russia and Thailand, and their Central Banks adding $6 billion to their gold reserves earlier in 2011. The Central Banks are moving to diversify from their USD currency holdings.
Charts and Market Psychology
Understanding that the fundamental drivers for the gold price trend are still valid, one can then look at the price history in the charts and obtain a reasonable estimate going forward. Technical chart reading is merely seeking to understand the price impacts of the psychological factors that are driving the markets.
I made a previous prediction about the silver price:
"silver to rise to between $42 to $48 USD, before a slight correction, and then further moves upwards"
I formulated this prediction using some relatively simple Elliott Wave understanding, and was proven to be remarkably close to what actually happened, with silver pricing peaking just above $50 USD. Of course, I did not foresee the multiple COMEX margin increases that drove most margined speculators out of the market and driving the silver price down by almost 30%. However, the bottom appears to be set at $34 USD and silver is advancing again.
Therefore, I am encouraged to attempt a similar forecast with the same Elliott principles and to apply them to the gold price in an attempt to foretell the possible moves upcoming for gold. I am using the GLD ETF as a proxy for the gold price in the following chart:
Elliot wave theory proposes that major advances by an equity consist of 5 impulse waves upwards. The waves numbered 1, 3 and 5 are the upward waves. The waves 2 and 4 are the correction waves. I am starting the wave count from about January 25, 2011, as that is the latest bottom and is the start of the latest upward climb of the gold price. According to the theory, the length of wave 5 will be 62% to 100% of the length from the start of wave 1 to the culmination of wave 3. Using the GLD price trace, this length is calculated to be from 15.5 to 25 units. This amount added to the bottom of wave 4, which is 143, gives us a target range of $158 to $168 for the GLD price peak.
Prediction For Gold Target
Transposing the GLD target numbers via a mathematical ratio to the gold price gives us a target range of $1628 to $1731 USD for the gold price. As I write on May 11, 2011, the gold price is presently at $1512 USD.
Positioning in the Gold Market
Having performed the above analysis, it may be concluded that the gold price has some more upside ahead, and it may be possible to make gains in the market by positioning correctly. What about the divergence of the gold mining stocks from the gold price? Traditionally, in a bull market, the mining equities should lead the gold price. However, presently, gold miners are lagging, and this may be due to a multitude of factors including the following:
* Cost of fuel or energy for miners is the major component of their costs and oil is extremely high at over $100 per barrel; therefore mining costs are escalating.
* Fast rising prices of the gold and precious metals have not yet translated into mining profits.
* Uncertainties in regular markets drains investment capital and liquidity from the mining equities.
* Lower grade ores for ever larger projects; in other words, miners are struggling to perform to investor expectations.
Therefore, in summary, even if the gold prices rise higher, only the best of the best gold miners will be able to profit from this. Which ones are the best of the best? Goldcorp (GG) comes forward-- having just released its first quarter 2011 results, with earnings more than doubled from 2010.
Disclosure: The author is long Goldcorp (GG).
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