It has been an interesting week for gold and gold stocks. After the HUI broke resistance on Friday of last week, we received our much needed confirmation by witnessing it rise 12 points (3.4%) to 365 on Tuesday. We jumped in by adding to our GDX position and picking up Jan07 call options of Yamana Gold (AUYAV.X).
In the following few days, the HUI proceeded to give back all of the recent gains, returning to 347 on Thursday and sitting around 338 on Friday. Speaking of 338, it is critical that the HUI hold above this support level. It represents not only the bottom line of the ascending triangle that created our buy signal, but it is also the 50-day moving average. Holding above 338 tells us the buy signal is still in place.
How Will A Recession Impact Gold & Gold Shares?
There has been much talk about a coming recession and the downward pressure it would exert on gold stocks. The question causing fear in the minds of many gold bugs is:
If the U.S. citizen has been the global engine buying up all the Chinese goods, then doesn’t it make sense that if a recession occurs in America, it would affect all commodities including precious metals?
It is important to remember that, unlike base metals, gold is viewed as a monetary asset. So while weakening economic activity will have a negative impact on base metals demand, it will not have the same impact on gold. Gold may have some short-term downside, as base metals give a weak tug on the gold price. But this is just guilt by association and once investors distinguish between gold and base metals, gold will quickly break loose from any association with industrial metals and rally. Because gold is a monetary asset, it will have a more direct correlation to inflation rates and currency fluctuations. Therefore, the predicted U.S. recession, with a declining US dollar, will have a positive impact on gold, even if base metals prices fall.
Chris Laird from www.PrudentSquirrel.com seems to thinks so, stating:
The single greatest force on gold right now is an expectation of a collapsing US economy due to the collapsing housing bubble. That expectation is overriding every major gold bullish force now. Even war fears in the Middle East. The expectation of a coming US economic contraction is a great hand over the gold and commodities markets now.
If China were to follow the US into recession, as I expect, I foresee a very large scale drop in commodity prices as well beginning in 2007 possibly by January, but definitely by June. Now there is one major caveat to all this, the US economic decline and gold dropping. That is major war news. War news is big for commodities and gold too.
Julian D. W. Phillips from www.GoldForecaster.com has a less gloomy view, commenting that:
One has to look at the sense of proportion on the global economy as well as on that of the U.S. The impact of a recession in the States, whilst Europe is still expanding