Tags: gold | technical | fundamental | production

Metal Mania on the Horizon

By Barry Elias   |   Friday, 05 Jul 2013 07:45 AM

Since my previous article last week recommending silver, the iShares Silver Trust (SLV) exchange-traded fund (ETF) has risen 6.3 percent. Strong technical and fundamental data suggested a strong upside potential for this metal.

The same dynamics apply to gold as well.

From a technical perspective, the SPDR Gold Shares (GLD) ETF is more oversold now than any time in its seven-year history, with a Relative Strength Index (RSI) hovering near 30. Since the inception of this fund, the relative strength index for GLD has rarely been below 50, suggesting a strong buying opportunity for the metal. In the past two years, the price of gold has fallen nearly 37 percent, from $1,900 to $1,200 per ounce.

The fundamental data suggest the same, since the market price is very close to the production price. If the market price declines, the quantity supplied will fall, causing the price to rise toward its equilibrium production cost.

Moreover, the cost of production has risen in recent years, and this trend will most likely continue.

From 2005 to 2011, the top five gold miners experienced a 27 percent decline in yield — with a large portion coming from depressed grades — and a 72 percent increase in energy use, according to data provided by the SRSrocco Report and the GFMS 2013 Gold Survey. These mines account for nearly 24 percent of total mine production and include Barrick Gold, Newmont Mining, AngloGold Ashanti, Goldfield and Goldcorp.

Given these technical and fundamental data, the price of gold is expected to increase over the next six to 12 months.

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