Gold: Caught in a Bear Trap

Gold has been caught in a bear trap over the past month.

Rising bond yields, a stronger U.S. dollar and an improving U.S. economy have squelched expectations for a third round of quantitative easing (QE3) and consequently, spelled trouble for gold. Since late February, gold has declined more than 7 percent.

As confidence improves, UBS says the yellow metal is losing the dual role of safe haven and risk asset: “Gold is moving off center stage, while growth assets are moving to the fore.” Earlier this month, we saw the largest weekly contraction in long gold positions on the Comex since 2004.

In his latest Gold Monitor, Dundee Wealth Economics Chief Economist Martin Murenbeeld lists 10 positive factors for gold, one of which is monetary reflation. We are currently experiencing one of the greatest global liquidity booms the world has ever seen. Over the past seven months, there have been 122 stimulative policy initiatives from central banks around the world, according to ISI Group.

Injecting liquidity into the global monetary system has been a steroid for stronger gold prices over the past decade. The global monetary base has ballooned three times larger, with gold increasing nearly six-fold.

While we are seeing strong signs of improvement in the global economy, it’s important to remember that the recovery has been built upon a mountain of printed money that cannot be hastily unwound. Dr. Murenbeeld explains, “Money doesn’t grow on trees; it will have to be borrowed by some government and/or it will have to be printed by some central bank.”

For these reasons, the long-term bull market in gold may very well still be intact.

From the article, “Gold and China: Where the Bulls and Bears Square Off” by Frank Holmes. Frank Holmes is chief executive officer of U.S. Global Investors – a registered investment adviser that manages approximately $2.8 billion. The information provided herein has been provided to MiningFeeds.com by the author and, as such, is subject to our disclaimer: CLICK HERE.

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