Gold And Miners Back In A Familiar Groove?

By James Brumley | October 28, 2011 AAA

It may have been the U.S. dollar's rally in September that torpedoed gold mining stocks, like Goldcorp Inc. (NYSE:GG), and the gold commodity ETFs, like the SPDR Gold Trust (NYSE:GLD). The former fell more than 14% from peak to trough a few weeks ago, while the latter slumped nearly 13.7%, from high to low, last month. However, it wasn't the greenback's demise that got gold names going again on Tuesday. This time around these names are rebounding for the reason they were going nuts all year long: because traders are scared senseless the global economy is going to collapse again.

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Of course, a global economic collapse will torpedo most currencies, so in many ways the rebound in gold on Tuesday was a currency-based trade; it was just a preemptive, and possibly presumptuous, one. It wasn't just gold though, silver popped too. The iShares Silver Trust (NYSE:SLV) jumped more than 5% on Tuesday, pulling First Majestic Silver Corp (NYSE:AG) and Endeavour Silver Corp (NYSE:EXK) up with it.

That's what adds a layer of legitimacy to the new-found bullishness. If it were just gold, investors could chalk it up to a little volatility, perhaps just a temporary emotional jolt. With gold, silver, platinum and palladium all moving higher, though, it's tough to say it's mere coincidence. This rebound in precious metals, so far, has been a calculated and strategic one. More often than not, that's how long-lasting rallies begin. (For more on commodity trading, check out How To Invest In Commodities.)

As for where this is all going, opinions so far have varied. MF Global's Adam Klopfenstein noted that gold was moving up with bond prices, as yields fell. The dollar as well, as the yen, also inched higher. He suggested it was the effect of a widespread "flight to quality," as fears of a failed summit in Europe started to swell, when Wednesday's meeting was cancelled. It's not a tough to understand sentiment; it's not likely the meeting was nixed, because all the problems were solved a day earlier than planned.

Other experts suggest the plunge in consumer confidence to multi-year lows will lock the Federal Reserve into a dovish mindset, which usually leads to even-lower interest rates and lots of cheap dollars; the kind of scenario that prods gold prices higher. (For more on the Fed's interaction with the market, read When The Federal Reserve Intervenes (And Why).)

The Bottom Line
Regardless of the reason for the strength, many pros are expecting even just a little more strength to lead to a lot more strength. TrendMax.com's managing director Zachary Oxman, for instance, feels the next time gold closes above $1700 per ounce, it could spark a rally to $1900. With that possibility against the developing economic backdrop, gold and mining stocks are brewing up a decent risk/reward ratio again.

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At the time of writing, James Brumley did not own shares in any of the companies mentioned in this article.

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