Will Gold Rally Forever?

Published Mon, Jun 11th, 2012   Karim Rahemtulla, Director of Resources

I’ve been pounding the table for weeks about buying undervalued gold shares…

Apparently, I had my head on straight. Because while the S&P 500 stocks were plumbing new lows for 2012, companies like IAMGOLD (NYSE: IAG), Goldcorp (NYSE: GG) and Newmont Mining (NYSE: NEM) rallied sharply in the past two weeks, increasing over 20%.

What’s more, these three gold stocks – and the price of gold itself – moved higher in the face of a stronger U.S. dollar.

It’s proof that there’s more room to run for gold shares. Still, critical trading points do exist that you need to be aware of.

In this brief video, I point out the technical support levels critical for gold to maintain if this momentum is to continue.

 

If these support levels are breached, the rally that we’re seeing could end up being a flash in the pan. But gold bugs can rejoice, because I don’t think that’s the case.

Here are three reasons why gold will continue to rally…

~ Reason #1: Governments worldwide are signaling that they’re adding more liquidity to the marketplace. Simply put, they’re printing more money.

This monetary stimulus is the sole reason to have faith that gold is moving higher. Paper money is being printed in quantities unheard of in modern times. Behind it all is in an effort to “stabilize” global economies and bail out the financial institutions both here and abroad.

~ Reason #2: Europe is on the verge of a bailout package. And it will match the $1 trillion the U.S. Treasury “created” in 2008-2009 to bail out U.S. financial institutions. They’ll do it through the issuance of bonds and guarantees for banks in the eurozone… or risk the collapse of the eurozone. It might get down to the wire, as political theater often does, but it will happen and the cash spigots will open.

~ Reason #3: China, experiencing its first slowdown in a decade, will loosen its monetary policy in order to stimulate growth. Just last week, the Chinese Central Bank lowered rates and the People’s Bank of China dropped its key lending rate by 0.25%. Granted, it’s not a lot, but it’s the first rate cut since 2008, which sets the stage for more cuts.

Make no mistake: We’re in the midst of a global reflation of enormous proportions.

When it’s all said and done, the effect of the global stimulus and bailout packages will be measured in the trillions of dollars, euros, yen, pounds and yuan.

That’s a lot of debasement and an excellent reason to be a buyer of gold and gold shares.

However, don’t forget those critical levels I mentioned earlier. They’re what you need to watch for in the short term.

Long-Term Buyer or Trader? Here’s How to Play Gold…

If you’re a long-term buyer, you want these support levels to be breached, because it means an opportunity to buy more.

If you’re a trader, set your stops based on the following levels:

The price of gold bullion must hold the $1,540 to $1,560 per ounce level or it risks falling to the $1,420 level. On the prior leg down, the price of gold held and rallied almost $100 per ounce in a matter of days.

That resulted in the huge spike in the price of gold stocks. On the upside, gold needs to trade above the $1,640 level in order to head back toward the $1,900 level and reach its all-time highs.

Bottom line: All the macroeconomic factors are presently pointing to a slowdown in the global economy and global demand for gold.

Yet all the reasons for buying and owning gold are more important now than ever before. If you want to maintain some semblance of purchasing power down the road, that is. It’s going to be a battle of the Central Banks versus the gold market… a battle that the Central Banks are doing their best to lose.

Ahead of the tape,

Karim Rahemtulla