The editor-in-chief of the American investment site Banyan Hill writes this strongly about the price development of gold and summarizes the factors behind the rise into three main elements..
Images: Banyan Hill
Text: Summary of the article of the same name (EN) on the Banyan Hill website
“A bull market never rises straight up.”
This is what Matt Badiali, the editor and investment expert at Banyan Hill, says in his March blog post. He shares that he learned this lesson early in his investing career. He also mentions learning several sayings related to bull markets, which contain a seed of truth. Bull markets:
- “climb up along the wall of worry”
- "born from pessimism"
- “growing skepticism”
- “they succumb to euphoria”
- Yes, "the bull market hides many sins"
Gold is rising again
The diagram above shows the end of the bear market (in December 2015) and the beginning of a new bull market. The blue line indicates the bottom of each new price cycle before the start of a new rise.
The deep trough was seen according to Badiali in December 2015, from which the blue line begins. Each subsequent bottom is higher than the previous bottom – that’s why the line points upward.
The peaks, in turn, represent periods when skepticism prevailed. However, the price dropped less and less each time before a new rise.
The transition of gold prices into a bull market is, according to Badiali, an excellent signal. The current peak price of $1350 per ounce is almost 30% higher than the December 2015 bottom.
Gold-producing companies performed well compared to consumer goods, as gold companies have leverage. Fixed costs have arisen from gold production, so an increase in the price per ounce directly translates to the bottom line. If a mining company extracts one million ounces of gold per year, an extra $10 per ounce means an additional $10 million in revenue.
Therefore, the VanEck Vectors Gold Miners ETF (NYSE: GDX) rose 88% from the beginning of 2016, when it was at its lowest.
According to Badiali, however, the bull market has only just awakened.
3 reasons for the rise in gold prices
The latest peak in gold ETFs was seen, according to Badiali, around the middle of 2016, when the price was $31 per share. Today, the price is only $22 per share. There has been a 30% increase in six months, but the level is still well below the peaks of 2016. GDX stocks would need to rise another 37% to reach the same price.
Badiali strongly believes that the rise will continue and that GDX will break the 2016 peak within the next six months. According to him, the price of gold is rising particularly due to three factors: a weakening dollar, global demand, and inflation fears.
All these factors make gold look attractive. This generates demand, which in turn drives up the price of gold. The increase does not need to be large to cause the next significant rise in mining stock prices. Badiali also reminds of the previous 30% increase in the price of gold, which led to an 88% rise in gold stocks.
