By TRANG HO, INVESTOR'S BUSINESS DAILY
Posted 06:44 PM ET
There's no shortage of money managers telling clients to stampede into gold in response to Europe's credit crisis and slowing growth in the U.S. Of the $18 billion in year-to-date inflow into commodity funds this year, nearly $16 billion went into gold funds like SPDR Gold Shares (GLD), EPFR reported.
GLD is 15% off its 52-week high, has found support near 150 and is testing resistance at its 50-day moving average.
Here's an overview of catalysts that could drive gold prices higher:
1. Central banks are hoarding the yellow metal to diversify their holdings. In the 12 months through March 31, central banks bought 400 metric tons, a 156% increase over the year-ago period, according to the World Gold Council. They haven't been major gold buyers since 1965.
Hong Kong shipped about 112 tons of gold to mainland China in April. That was a 62% month-over-month gain and marked the second-highest monthly export, the Hong Kong Census and Statistics Department reported June 4. The flow of gold from the mainland to Hong Kong jumped 38% to about 38 tons.
"We are more likely to see shortages of the physical metal occur, unless the price moves significantly higher to offset the buying binge," said Peter Spina, president of Goldseek.com.
2. Rock-bottom interest rates are likely to continue. When interest rates are low, there's less opportunity cost in buying gold vs. parking money in risk-free bonds. Benchmark 10-year bond yields have tumbled to 1.6% — a record low — and could even fall south of 1%, says David Levy, economist at the Jerome Levy Forecasting Center. He sees a global recession over the next two to three years.
"Given the intensifying shortage of safe assets, significantly lower yields are possible," he wrote.
3. Quantitative easing continues in Asia and Europe and is coming in the U.S.
"They'll print — globally — up to $15 trillion over the next three years," says Terry Sacka, chief strategist at Cornerstone Asset Metals. "Currency is printed out of thin air backed up by nothing. The amount of bonds supporting bonds supporting bonds is unthinkable."
4. Countries will have to continue to spend to prop up weak economies. Globally, governments' answer to their debt problem involves taking on more debt.
5. Countries are devaluing their currencies to make their exports more competitive, which decreases people's buying power. People will want to buy gold as a store of value. "Four-thousand years of recorded history have proven one thing: that all fiat currencies fail and gold has maintained value," said David Morgan of the Morgan Report.
The Bearish Case
Gold and silver are likely to fall because we're in the early stages of a credit crisis similar to 2008, says Daryl Montgomery, author of "Inflation Investing — A Guide for the 2010s."
"Gold goes down during a credit crisis because central banks lease their gold to cash-hungry banks and hedge funds, who sell it on the market because they can't readily sell many of their paper investments," he said.
Montgomery's downside target for gold is the 40-month moving average, which is currently about $1,380 an ounce in the futures market and $133 a share for GLD. His downside target on silver is $18 to $23 an ounce.