Back On Track

Gold has fought back to where we were a couple of months ago — knocking on the door of $700 gold.

There are a couple of crucial differences this time, however...and they bode well for gold’s prospects in the weeks ahead.

Thanks to a growing disillusionment with fiat currencies (the dollar in particular), and gold’s expanding popularity as a currency in its own right, gold has clawed its way back toward its bull market highs.

This is familiar territory. In late February, we were at a nearly identical point, and setting our sights on $700. But at that time, the market was being driven by paper traders, with the large commercials lined up at record levels on the short side, and the speculators lined up to an equal degree on the long side.

At that point, we were hoping that the commercials, whose short positions were deep underwater and getting deeper, would throw in the towel and spark a short-covering rally to well over $700.

We recognized, though, that the commercials are rarely wrong (although when they are wrong, they are spectacularly so). In this case, the commercials turned out to be correct, as a major sell-off on the Shanghai stock exchange sparked a global liquidity crunch and a sellers’ raid on virtually all investment assets.

As I say, gold and its precious metals brethren have fought valiantly back to this point. The difference now is that the commercials and speculators have pulled in their horns, with the open interest (and the commercial short positions) well off their recent highs. So the market has not been propelled, to this point, by volatile, hot-money flows.

Instead, it has been pulled higher by significant physical demand, particularly in the gold ETFs (if you call that physical demand).

This is an exceedingly positive development for gold, and the most recent gains -- in reaction to a broadly lower U.S. dollar -- show that the trend is building steam.

As usual, the short-term picture is cloudier than the long-term view. We may have already experienced our typical seasonal correction in gold and the resource stocks, or we may have another sharp correction before hitting the summer doldrums. But a steep correction is most likely to come only after a euphoric rise, and that’s one thing we have yet to see.

It may be on the way right now. In the meantime, I have been reporting in Gold Newsletter on some significant developments in specific stocks and markets, and our readers have been enjoying some exceptional gains in recent days.

While my specific advice is restricted to subscribers of Gold Newsletter, I can say that, generally, we are keeping a cautious eye on the metals markets, looking for any signs of overheating. If it seems like these markets are getting ahead of themselves, we will not hesitate to take some profits, in hopes of going on a buying spree during the mid-summer doldrums.

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Brien Lundin is the editor and publisher of Gold Newsletter, a publication that has ranked among the world’s leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com.

Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world’s oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.