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4 Reasons Why I Like Gold Now

By    |   Monday, 15 Jul 2013 07:41 AM

Back on June 24, I wrote to you that soon there would be opportunities to own gold and silver again.

Well, I believe we're in the bottoming phase for gold. Could it drop a little lower before heading higher? Yes. But I believe the worst of the downdraft in gold is over.

So now let me tell you the four reasons why I believe this is the case.

Firstly, investors say that there's not a fundamental way to value gold. However, there is a way to know when you're buying gold at a good price for the long term. It has to do with the production costs (breakeven costs) for gold miners.

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You see, it doesn't matter how much gold is in the ground as much as it matters how much "real supply" you can get your hands on. Well, you can't get your hands on it unless miners dig it up. And they're not going to dig it up for very long unless it's profitable to do so. After all, these gold mining companies aren't charities. They are "for-profit" companies.

So the thing to find out is where is the level where these guys begin to not make money anymore by mining gold.

In a recent survey of approximately 50 mining companies, there was a consensus that the average breakeven cost on production was in the $1,200 to $1,250 area.

Now, can gold's price dip below these levels? Sure. However, if it does it for very long, gold miners will slow down their production rates or close their mines altogether until it becomes profitable to mine gold again.

So if you're a long-term investor and you're buying gold anywhere around the production costs or below, then you're likely buying gold at a great value (as long as you are willing to hold it for some years).

Secondly, I like gold because hardly anyone else does. In the investing world they call that "negative sentiment." And the negative sentiment has reached an extreme. It seems everyone is now confident that gold is in the toilet and will eternally go down from here.

When the crowd gets adamant about a position for a while, you can bet that the sentiment is causing the asset at hand to be overdone ... and right now, that's what is happening with gold. It's being overly sold to the downside right now.

By the way, speaking of sentiment extremes, the investing community is very bullish on the U.S. dollar right now too. I believe it's at an extremity too, to the upside.

The crowd almost always gets it wrong at sentiment extremes. It's because they get so emotional over the asset at hand to where they can never see it changing direction. However, that's usually when it does begin to change directions.

So it wouldn't surprise me, that if in the weeks to months ahead, the dollar begins to take a major dive again and gold starts to head up to the $1,500s over the next 12 to 18 months.

Thirdly, I believe that the tide is about to turn for gold because the selling is drying up. The selling volume back in April was some of the largest selling volume I've ever seen in gold. Most of this was gold exchange-traded fund sellers, since gold coin purchases were still very high and since central banks were still buying gold bars.

But back to the volume for a moment, as gold recently went below $1,200 and hit a new 52-week low, the selling volume was two to three times less than it was back in April. That tells me that those who hold gold and are looking to sell have most likely already done so and the selling is about to come to an end.

Fourthly, I'm looking at some indications on the chart that gold's descent may be about to come to an end.

For starters, the price of gold is very far stretched below its 200-day moving average. That moving average, at the time of this writing, is at $1,575 per ounce and gold is trading at $1,277 per ounce.

When the price gets that far stretched away from this major moving average, a sideways range or a snapback higher typically happens in the weeks to months ahead. And I believe that will be the case this time too.

But in addition to this, the moving average convergence divergence (MACD) indicator is producing positive divergence. This is where the indicator makes a higher low, while the price is still making a lower low.

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What that tells me is that the downward momentum is likely slowing down and a turn upward in gold is very likely going to take place in the weeks and months ahead.

So since the price of gold is stretched so far from its 200-day moving average and the MACD divergence is happening, we'll likely see gold bottom soon (if we haven't already just seen it).

Could there still be a bit more downside left? Yes, but the downside risks now versus the upside reward I believe has now become very favorable to investors who want to own gold and are willing to hold onto it for a few years.

So it's for these four reasons above that I believe that gold (and even silver and gold stocks, etc.) are about to head higher over the coming months.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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SeanHyman
I believe we're in the bottoming phase for gold. Could it drop a little lower before heading higher? Yes. But I believe the worst of the downdraft in gold is over.
gold,dollar,average,silver
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2013-41-15
Monday, 15 Jul 2013 07:41 AM
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