Gold Up After U.S. Debt Limit Raised -- Time To Buy?

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Gold and silver regained luster as the dollar plunged to a two-year low after Washington averted a crisis by raising the country's debt limits through Feb.7.

The bulls and bears have to decide whether precious metals are staging a short-covering rally from oversold conditions. Or is it a real trend change in response to the temporary spending measure?

Bullish gold investors contend that lifting the debt ceiling calls for more Federal Reserve money printing, which in turn debases the dollar and lifts prices of precious metals.

"The government reopened without any spending cuts and the debt ceiling was raised without any budgetary discipline, which suggests that the overspending and excessive monetary creation will continue," said Adrian Day, founder of Adrian Day Asset Management in Annapolis, Md., with $125 million in client assets.

"Yesterday's deal represents the capitulation by all congressional factions to the intractability of the U.S. debt problem, by effectively shelving the debate until Feb. 7," Tom Winmill, portfolio manager of Midas , with $205 million in assets under management, said in an email. "Perhaps the precious metals markets sense that the next four months may be promising clear sailing for hard-asset prices."

Thursday's Price Action

Spot gold prices popped 3% to $1,324 an ounce intraday.

In the stock market today ,SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, gapped up 3% to 127.62. It still trades below its 50-day and 200-day moving averages, indicating a strong downtrend.

Market Vectors Gold Miners ETF ( GDX ) surged 7% to 24.93. It still trades below its 50- and 200-day lines.

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, skidded 1% to 21.47 -- it's lowest price since October 2011. The 10-year Treasury bond yield has dropped 7 basis points to 2.73%.

The Bear Case

Lower bond yields imply a higher gold price because the opportunity cost of buying gold decreases as investors earn less on cash, but short-covering was the primary driver of gold's rally, according to analysts at Standard Bank.

Short positions, betting on falling prices, in gold futures has been increasing as prices declined over the past week, suggesting new short positions were added and were covered over the past 24 hours, they suspect. All the while new long positions, betting on rising prices, are waning.

Economist Harry Dent, founder of HS Dent in Tampa, Fla., believes gold and silver were just rebounding from oversold levels.

"Gold has been mortally wounded by accelerated stimulus but with falling or muted inflation," he said in an email. "We are in a deflationary environment with governments inflating massively to prevent (deflation)."

Gold, seen as a hedge against inflation, loses value in deflationary environments. Dent believes gold could make a short-term bounce to $1,420-$1,520 an ounce through the first quarter of 2014 and then roll over, eventually sinking to $700-$740 an ounce in 2015. He goes so far as forecasting gold will tumble to $250 an ounce between 2020 and 2023.

The Bull Case

The gold bugs on the other hand are betting on Janet Yellen to take over for Federal Reserve Chairman Ben Bernanke and believe she will continue quantitative easing.

"As recession bites, I think we will not see and end to (QE) under Yellen," John Browne, senior economist at Euro Pacific Capital, a brokerage firm Westport, Conn., said in an email. "Plus a continued negative real interest rate favors gold and silver."

Physical demand for gold remains strong, says Terry Sacka, chief strategist at Cornerstone Asset Metals in Palm Beach Gardens, Fla.

"With a partial debt resolution and Janet Yellen being brought into the Fed, most will conclude the printing will continue," he wrote in an email. "A rush may occur in physical purchases to try and catch a bottom and shore up some inventory."

Silver Prices

Silver prices climbed 2.5% to $22.06 an ounce.

IShares Silver Trust ( SLV ) bounced 3% to 21.15.Global X Silver Miners ETF ( SIL ) soared 7% to 12.95.

SLV and SIL remain below both their 50- and 200-day lines, indicating a strong downtrend.

Follow Trang Ho on Twitter @IBD_THo .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: GDX , GLD , SIL , SLV , UUP

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