Why hasn't gold moved more? Many analysts and investors are frustrated that, with everything happening around the world, gold hasn't moved more. One well-known investor was quoted as saying that "the fact that gold isn't over $1,900 amid the European debt crisis means the bull market is over."
This is nonsense. Yet we should consider why gold is not higher. There are simple reasons. First, in the early summer, gold jumped over $1,900, moving well above trend. After such a sharp move, it should be no surprise to anyone that gold fell back. September's fall brought it back to that well-defined trend, but we should not expect it to bounce right back to new highs. In fact, gold's action since the September lows of $1,600 ($1,532 on an intra-day basis), has been very constructive indeed.
What prompted the drop was simple: the sudden collapse in global stock markets in response to Europe's worsening debt problems led to margin calls and fund redemptions. In such cases, when investors have to sell, they sell what they can, what is most liquid, and not necessarily what they want to. In this case, gold, which showed nice profits for most investors, was sold.
Renewed forced selling remains a possibility for gold, if we saw another collapse in global equity markets. But more likely, after September's shock, managers have been stepping up selling of other assets.
Apart from this near-term possibility, the environment is very positive for gold, with negative interest rates in most of the world, and an ongoing distrust of fiat money. There may be some back and forth in the next several weeks, but we expect gold to trade significantly higher next year as the debt crises in Europe and the U.S. continue to dominate headlines with no fundamental resolution in sight.
At the same time, the gold stocks, despite their recent rallies, remain fundamentally inexpensive, trading at some of their lowest valuations relative to bullion in recent years (other than the extremes at the end of 2008). Miners now see margins expand and have become more disciplined about making returns to shareholders, with some constraint on new share issues and a new focus on dividends.
As gold continues to move up, even at a modest pace, I expect the gold stocks finally to exhibit that famed leverage to bullion.
Adrian Day is president of Adrian Day Asset Management, a boutique money management firm offering separate accounts in global markets with a specialty in resources (AdrianDayAssetManagement.com; 410-224-2037). He will talk on Sunday, Nov. 27, during the San Francisco Hard Assets Investment Conference.
