Will Central Banks Prolong the Gold Rally?

As gold was jumping again last week, the yen fell to a 31-month low as traders expected more action from the Bank of Japan to weaken its currency through more government bond buying. Like the Federal Reserve and the European Central Bank, the Bank of Japan has embarked on a series of quantitative easing measures to jolt the economy from the 23rd year of its extended "Lost Decade."

Also like the Federal Reserve, the Bank of Japan is expected by the analyst community to declare open-ended quantitative easing. Previously, target quantities of government bond buying would be set. These measures did not work. Now, again like the Federal Reserve with its jobless rate aim, the Bank of Japan has announced a new goal: a 2% inflation rate. There was a price increase in yen puts, so traders are expecting it to fall more in the months ahead, which is bullish for gold. As an export-oriented nation, Japan needs a weak yen to make its products more competitive in international trade.

Overall, central bankers in the U.S., Japan, and Europe have created trillions in greenback equivalents in efforts to stimulate the respective economies. This unprecedented expansion of central bank balance sheets has clearly not delivered what is needed to awaken the economies. Europe is in a recession, the U.S. is plagued by a weak recovery from the Great Recession, and Japan is into the third decade of the "Lost Decade."

Last year, China joined the others with an announced $156 billion stimulus package. But with more than $3 trillion in foreign reserves, a high domestic savings rate, and a robust surplus in international trade, the People's Republic can easily finance it in a less inflationary and more responsible manner. From the early indicators, it appears as if the stimulus efforts in China are working as gross domestic product growth for the last quarter was registered at 7.9%, breaking almost two full years of quarterly declines in the rate of growth. China also needs to keep its currency weak so it can export more, too. This makes gold look even better as the world's largest economy by purchasing power now needs economic stimulus, too.

These actions over the years by central bankers have been very kind to GLD. Every single one has stated unequivocally to the financial markets that the economies were weak and fiat currencies would become even cheaper. That naturally directed investors into the yellow metal and other hard assets.

The chart below shows how GLD has surged since The Great Recession was reported to have ended. That bullish trajectory continues as GLD is up 6.6% for the last six months. I would avoid daytrading the precious metal and look towards holding for a minimum of six months. (For more information about daytrading, see FinancialTrading.com.)

Expect this to continue for the GLD and other precious metals. SPDR Gold Shares are now trading above their 20-day and 200-day moving averages.

Volume has been above the mean in recent market action. The most recent week of trading concluded with gold futures performing an "outside day" with the low that day being lower than the previous day's, and the high topping the peak the day before, too. That's a bullish technical indicator as the broader trading shows a greater demand.

These technical indicators are useful for short-term moves, but it's the action of central banks will result in big gains for the long term for gold. The recent actions of central banks from the U.S., Europe, China, and Japan certainly demonstrate that fiat currencies will not be ending the 12-year bull market in gold anytime soon.

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