Though he writes about one gold mining stock in particular, OTC Speculator puts forward excellent reasons to load up on gold stocks in general right now. His bullish case for gold is “rather simple”:
First, I believe that gold prices have been largely manipulated in recent months by the central banks, which have effectively capped the price at $700. This was enough to turn the technicals for gold bearish, and so the technical traders have fled the market. However, having expended a lot of gold reserves to keep gold prices in check, European central banks are now left with startling little ammunition with which to fight off another attack on the $700 mark. Meanwhile, central banks of developing countries (the BRICs and the Middle East) will begin buying gold to diversify away from the dollar. Thus, I believe the trend toward central banks being net sellers will reverse itself over the second half of this year, putting upward pressure on gold prices.
Second, the recent extension of the subprime crisis to several major hedge funds indicates that default rates are in fact rising and not stabilizing, and housing continues to show signs of further downside. The spreads on subprime loans look set to widen once again, which is going to put even more pressure on housing and on the economy in general. The implications of this crisis for Fed policy appear to be very clear, and the Fed can very quickly stabilize the housing market by ratcheting down interest rates in the second half. I believe they will have to do this to prevent subprime problems from spreading, but this will put very serious pressure on the dollar as interest rate differentials narrow (and perhaps even flip) between the EU and U.S. government bonds.
I would also hasten to add that an extremely large gold miner with probably the largest hedge books in the industry has turned into a gold bug.
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