Technical breakout signals end of gold bear market, says ETF provider Van Eck

Mar 15th, 2016 | By | Category: Commodities

Van Eck Global, the asset manager behind the Market Vectors range of exchange-traded funds, has declared that the bear market for gold is over in its February edition of Gold Market Commentary. The paper, which comments on key factors driving price changes in the yellow metal, shows that from a technical perspective gold has clearly broken free of a downtrend that began to establish itself in early 2013.

Gold breakout signals bull market start, says Van Eck Global

Gold mining stocks rallied in February, providing leveraged returns compared to increases in the price of gold over the same period. Van Eck argues this is indicative of the start of a bull market in the yellow metal.

Following its crash in 2013, the metal traded in a declining $150 range that in December stood between $1,050 and $1,200 (see chart below). However, the precious metal has been on the rise since February, reaching a high this year of $1,272 an ounce on 10th March.

This technical breakout has convinced Van Eck to declare that the long-running bear market in gold is over.

To support this, Van Eck data shows that stocks of gold mining companies have experienced leveraged returns typical of a positive gold market. The NYSE Gold Miners Index, which underlies the Market Vectors Gold Miners ETF (GDX), gained 36.1% in February while the Market Vectors Junior Gold Miners Index, which underlies the Market Vectors Junior Gold Miners ETF (GDXJ), advanced 35.0%. This represents a significant leveraged return above a 9.1% increase in the spot price for gold over the same period.

Leveraged increases in mining stocks may reflect the beginning of a bull market as the smaller total market capitalisation of the gold miners’ segment compared to the global gold market supports the tendency for equity markets to more rapidly adjust prices to new information or market sentiment. This has allowed strong market expectations to push equity-related gains above recent increases in the gold price.

Apart from technical factors, Joe Foster, Portfolio Manager at Van Eck, argues that fundamental factors such as global uncertainty may continue to drive increases in the gold price during 2016. He notes that economic headwinds have escalated, from local occurrences in Asia and Europe to global concerns that now include the United States. The US has been in a manufacturing recession and reports suggest that the services sector, which makes up the bulk of the economy, is beginning to weaken. With global economic activity struggling to gain momentum, gold may continue to be highly valued as a diversifier and tool for de-risking portfolios.

Additionally, the headwinds reaching the US have had a dampening effect of the long-running appreciation in the US dollar, supporting demand for gold from international buyers.

Foster also notes that the adoption of negative interest rates in many European countries and Japan has escalated the risk of a systemic financial crisis. Even Federal Reserve Chair Janet Yellen said recently that the Fed is evaluating whether negative rates may present an option for monetary policy in the US.

Foster argues that prolonged, excessive stimulus programmes by central banks are causing the market to discredit the effects of such policies; further aggressive action may put the whole financial system at risk. “If negative rates work their way into commercial deposits, it might undermine money market funds, pension funds, and the insurance and banking industries,” writes Foster.

On the political front, Foster notes that Middle Eastern turmoil, and the outcome of the US presidential race and the British referendum on EU membership are also key factors influencing global uncertainty. Amid this backdrop of volatility, gold’s safe-haven property may continue to drive demand as it did during the first two months of the year.

Looking forward, investors will be searching for clues as to the extent of a bull-run during 2016. Foster points out that the next major technical resistance is at $1,600 an ounce, which was the support level before the crash in 2013; however, he believes reaching this level is unrealistic in 2016. “At some point during the first half of 2016, we expect gold to pull back and consolidate. At that point, the depth and duration of the correction will help determine whether this is a new positive trend.”

Gold breakout signals bull market start, says Van Eck Global

Following gold’s crash in 2013, it traded in a declining $150 range that in December stood at $1,050 to $1,200.


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