Three variables to consider before investing in gold

While there continue to be many gold bugs out there, I’m not one of them—but I do see gold as a trading opportunity.

Given what we have seen so far and looking ahead, I just don’t see gold as a buy-and-hold strategy at this time. Yes, there’s money to be made, but it’s going to be for traders only.

The recent break below $1,300 an ounce and the subsequent rally to the current $1,325 level is an example of such a trade, not a new trend that’s developing on the charts, based on my technical analysis. The chart below shows the potential declines in the metal towards $1,200 and $1,100 an ounce.

Many gold supporters will counter that China is hoarding gold and India will soon pick up its buying. While I don’t argue against this, I just don’t see the yellow metal retaining its luster at this point unless a war breaks out in Ukraine and Russia intensifies its threat. If this should happen, it would drive Russia’s gross domestic product (GDP) growth lower and could result in the fragile eurozone and European economies retrenching back into a recession that just ended.

I wrote about gold several weeks back as a trading opportunity on dips below $1,300. I continue to hold on to that belief, but longer-term, the yellow metal could fade and fall back towards $1,200 or less.

My thinking is that inflation is nowhere to be seen in the United States, China, or Europe. (In fact, deflation may be more of a concern here.) And unless inflation picks up, the yellow metal isn’t going higher on a sustained move. That’s one of my top reasons why gold may head lower.

A second reason is that the Federal Reserve is continuing to cut its quantitative easing via its monthly bond purchases. The move is meant to force yields, interest rates, and the U.S. dollar higher. If it succeeds, the stronger value of the greenback will negatively affect demand for the yellow metal, which is priced in U.S. dollars.

My third reason is that, unless economic growth falters in this country, we will likely see capital move into the stock market and equities versus gold. After the strong returns in 2013 coupled with the poor start to 2014, traders are likely to be more inclined to funnel money into stocks than gold at this time.

Now, if the economy does weaken and a conflict escalates in Europe, gold would then move higher under these circumstances, but its sustainability would be an issue.

So the way I view it is that gold is only for traders and not for buy-and-hold investors at this time. If the three variables I talked about hold true, then investors can expect the yellow metal to inevitably trend lower. But, of course, there will be quick shorter-term trading opportunities that will still surface.

by George Leong, B. Comm.

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