After treading water for almost a year, gold is beginning to show signs of strength.
Gold has risen to about $1,288 an ounce from a low of $1,198 on March 14 (the day before the Federal Reserve's rate-hike announcement). Why the increase, and will it continue in April? My view is that it will -- for several reasons.
First, inflation appears to have become a bit more worrisome, and gold serves as a nice inflation hedge. Official statistics for January calculated U.S. annual inflation at 2.5%, while February was running at 2.7%. It's been several years since the inflation rate has topped the 2% range.
Second, markets seem to be pricing in a small but increasing lack of confidence in the Fed. High debt levels and a bloated Fed balance sheet are giving investors pause when it comes to central bank's ability to react to challenges it could face in the near future. The Fed's forecasting abilities were already severely in question, and now investors are beginning to wonder about the bank's ability to react to unforeseen events as well.
Third, the U.S. dollar's weakness has been a contributing factor to rising gold. The U.S. Dollar Index (^DXY) fell from 101.62 to 99.80 in just a week following the Fed's March 15 rate hike. I view gold as the ultimate form of money, so precious metals reflect any such decreases in the greenback's value.
Finally, gold is moving higher simply because investors are seeking value. Stocks and bonds are trading at or close to all-time highs, but gold is still far below its $1,900-an-ounce historic high. To me, that means that gold represents real value.
For those looking to play the gold rally, Jonas Elmerraji, TheStreet's technical analyst and chartist, says that gold miners could be the vehicle.
"Because every marginal dollar gold miners get for extracting gold beyond their break-even point has an even bigger impact on profitability than the last, a rising-gold-price environment means industry earnings scale up at a rapid rate," he wrote recently, pointing to a handful of stocks including Randgold Resources Ltd. (GOLD) - Get Report and small-cap minerMcEwen Mining Inc. (MUX) - Get Report , among others.
The Bottom Line
As we head into a second quarter that promises continued Fed-jawboning and predictions of more rate hikes, don't be fooled by the conventional wisdom.
The positive case for gold seems solid to me. Investors buy gold when they sense danger because gold has an impressive record of preserving wealth through economic depressions, stock-market crashes and every other type of financial or monetary crisis.
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At the time of publication, Williams was long physical gold, although positions may change at any time.