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Should The Gold Rally Be Trusted?

Chris Lau, Kapitall: A gold rally is on hold as the world looks to Syria, so what should investors think?

The price of gold, along with gold mining stocks, both appear to have bottomed at the beginning of July. A $1,400 per ounce gold price is frequently mentioned as a point for higher prices ahead. With gold closing recently at $1,417.80 per ounce, what should gold investors expect next?

[Read more from Kapitall: Ford and GM are Growing: Will Tesla Have to Sell Cars to Compete?]

Gold demand

Asia and India are sources of true demand for physical gold. Gold prices could remain steady if the oversupply from miners is alleviated. Miners like Barrick Gold (ABX) and Goldcorp (GG) are reducing exploration and mining expenses in response to low gold prices.

Click on the interactive chart to see data over time. Sourced from Zacks Investment Research. 

Gold fundamentals still strong

Higher debt from governments should support the view for higher gold prices. The deficit in the United States is still growing, and could grow even faster if the nation decides to wage an attack on Syria.

The US could raise the debt ceiling again in September, potentially fueling higher appetite for gold. For the week ending August 23, 2013, demand for gold ETFs was 4.7 tons.

Bottom line

Threat of intervention in Syria will dominate the direction of gold prices in the near-term. Investors should expect the current rally in gold to hold, but should be cautious on buying mining stocks. Barrick Gold is addressing its weak balance sheet by selling assets. The company recently sold three mines in Australia for $300 million, but will need to sell more to reduce its massive debt of $14.4 billion. Risks associated with its Pascua-Lama mine will still limit upside. 

 

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