Will Central Banks Prolong the Gold Rally?

By Marcus Holland of FinancialTrading.com

NEW YORK ( TheStreet) -- It's no surprise that SPDR Gold Shares ( GLD) rose 1.3% last week in response to news about the German and Japanese central banks.

After all, gold prices have been rising for more than five years as Federal Reserve Chairman Ben Bernanke and other central bankers around the world have responded to The Great Recession with inflationary monetary measures.

I am expecting the GLD exchange-traded fund to continue surging in the long term due to these policies. Overall, the world's central banks increased the holdings of gold in 2012 by 17% to 536 metric tons. In addition to reducing the supply of gold, central bankers have greatly increased the amounts of fiat currencies. No mystery as to what happens next: Gold should continue to increase from basic supply and demand factors. (For more on gold and gold prices, see FinancialTrading.com.)

It turns out this was the biggest addition to government stockpiles of gold in 48 years. It was also the first time in decades that central banks were net buyers of the yellow metal. In 2013, analysts estimate another 280 tons of gold will be purchased by central banks in just the first six months. This is a nice heads-up to traders from central banks that they will be buying large through July.

The most recent gift to precious metals speculators on how to bet was from Germany's central bank, the Bundesbank. It recently announced that it would be bringing gold home from the Federal Reserve Bank in New York. Eventually, the Bundesbank wants half of Germany's gold back home, a big jump from the present amount of 31%. That means 300 tons of gold from New York and 374 tons from Paris will be embarking on a one-way journey to vaults in Frankfurt.

Across the pond, newly released transcripts from Federal Reserve reactions to the exacerbating global economic crisis in 2007 were unsettling. U.S. officials such as Bernanke and Tim Geithner, then the president of the Federal Reserve Bank of New York, grossly underestimated the severity of the looming financial crisis.

In May of 2007, Bernanke declared that there were "good fundamental reasons to think that growth will be moderate," as The Wall Street Journal reported recently. By the end of 2008, the Federal Reserve was on a massive stimulus campaign to rescue the global economy with the first waves of trillions of dollars of asset purchases and the lowering of short-term interest rates to near zero. That also led to the surge in gold that continues today.

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.