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Why Are Gold And Gold Stocks So Flat?

Why Are Gold And Gold Stocks So Flat?

Why Are Gold And Gold Stocks So Flat?
June 21
12:39 2012

 The stock market acted bullish on Tuesday, and the supposed reason was the hope that Ben Bernanke and the Federal Open Market Committee are going to make a big announcement.

After the FOMC concludes its meeting on Wednesday Bernanke is supposed to have a press conference, and maybe he might pop the cork on a surprise bottle of stimulus champagne.

Is that possible? Yes, especially in the light of the uncertainty and banking instability in Europe and in this country. Is it likely to happen Wednesday? My guess is no, not yet.

Why am I feeling like the saying of the day should be “ready, get set, not yet”? Blame my cynicism on the price of gold, which didn’t participate in Tuesday’s rally, and actually went down.

If the FOMC and Bernanke were all set to use their biggest options to stabilize the U.S. and European economic woes, I would think we’d see this reflected in the price of gold moving decisively higher.

Take a look at this 12-month chart of the SPDR Gold Shares(GLD), an ETF that’s geared to closely replicate the price of 1/10th of an ounce of gold per share. Gold closed Tuesday at approximately $1,619, down almost $8 an ounce from Friday’s price. GLD closed at $157.16, down about a half of 1%.

precious metals futures

So if you’re a believer in the Elliot Wave Principle, you might be able to decipher the notion of a 4 wave pattern downward (from the August-September 2011 highs) that may have ended around May 16.

The theory suggests to its adherents to look for a 5 wave that the majority of time brings a climactic ascent to new highs. If that happens for gold it could come before 2012 closes.

The gold-mining stocks as represented by the Market Vectors Gold Miners ETF(GDX_)are still well below both their 100-day and 200-day moving averages, as seen in this chart.

gold mining stocks

GDX, including such behemoths as Barrick Gold(ABX) (ABX), Newmont Mining(NEM)and Goldcorp(GG) representing nearly 44% of the fund’s total assets, isn’t signaling euphoria yet.

It apparently bottomed on, you guessed it, May 16, hitting a 52-week low of $39.08. At Tuesday’s closing price of $47.68, it has rebounded 22% off those lows.

Will gold stocks continue this upward momentum? The answer hasn’t been confirmed yet either technically or fundamentally.

If the FOMC and the central banks of the EU and the UK don’t start inflating Western economies in a powerful way soon enough, the price of precious metals and the mining stocks will nose-dive again.

Do I really think the Fed and the central banks will sit on their hands indefinitely? Absolutely not, but it wouldn’t surprise me if they stall just long enough to raise investors’ blood pressure.

Another reason I believe the Federal Reserve will postpone the eventual next round of quantitative easing is this is a presidential election year, and the Fed doesn’t want to be accused of doing anything that favors either candidate.

My third reason for my sense that the Fed isn’t going to generate some big, powerful and exuberant surprise on Wednesday is the problems in Europe are still hanging over the world’s economy. The trauma-drama could play out more and emotionally lubricate the ultimate solutions.

The so-called “Operation Twist” ends this month, so I’ll leave the door open for the Fed chairman to announce an extension of this program as well as reiterating the FOMC’s readiness to drop billions of dollars from helicopters at a moment’s notice if the economic news gets much scarier.

Carol Pepper, CEO of Pepper International, told Jeff Macke on Tuesday’s Yahoo!(YHOO)Finance “Breakout” show that Bernanke has “absolutely left the door to open to more easing” and she expects to see it by September, despite this being an election year.

She indicated that bringing on more stimulus so close to an election would be controversial, to say the least.

Yet, Pepper says this is a secondary concern compared to the need for the Fed to emerge as a leader to Europe, if only symbolically.

Would Europe follow the Fed’s lead? She indicated, “Almost certainly not, but at least the FOMC will have demonstrably done what it can in response to the threat of recession.”

er argument, and a plausible one too, is that “… waiting until September gives the Fed more data to support a cut and buys more time for Europe to try to come up with a plan to save themselves.” (I’d call that chance similar to a snowball’s chance in Hades.)

Whatever the Federal Reserve does, it will most likely be a carefully timed, skillfully choreographed worldwide announcement to coordinate the kind of rescue package for Europe that will then, and only then, signal a sustainable, longer-term monetary easing strategy.

If you’re optimistic about the idea of a worldwide, coordinated monetary easing program being hatched before the end of the summer, you might want to look at some of the promising names among the precious metals stocks.

You might consider Yamana Gold(AUY), which recently added Extorre Gold (XG) to its gold- and silver-producing mechanism via a cash and stock buyout.

A more conservative yet still-promising way to get some leverage on the price of gold and silver eventually climbing towards the sky are through buying some royalty-streaming companies.

Three of my favorites are RoyalGold(RGLD), Franco Nevada(FNV) and, for those of us who think silver prices may rise faster than gold in the months and years ahead, look atSilver Wheaton(SLW).

A three-way comparative chart of these companies, which are famous for buying the precious metals at wholesale and selling them at retail, is below for your viewing pleasure.

precious metals mining

Source: The Street

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