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Is Soros Bottom Picking In The Gold Sector?

(Kitco News) - After getting pummeled late last month, gold bulls are done licking their wounds and starting to feel more positive about the future ahead. Legendary hedge fund manager —George Soros —is reportedly accumulating positions through the second quarter in Barrick Gold Corporation (NYSE: ABX). As Barrick trades near the lower end of its 52-week range ($18.45-$6.52) at $8.30 on Friday it begs the question —is Soros picking a bottom in gold mining shares and is that a bet that gold is near a bottom too? Let's take a look at a couple of factors that could support gold in the days, weeks or months ahead.

1. The U.S. stock market bull is old and overdue for a correction or worse. The major stock averages are in the red for the year, volatility is rising, and the famous "death cross" is seen on the Dow Jones Industrial Average chart.

Pick your poison. There are plenty of potential triggers for a continuing rout in the U.S. stock market.

  • China slowdown. News reports this week that early indications about China's manufacturing sector revealed it slid to its lowest level since the global recession triggered shivers throughout global stock markets. U.S. and European stocks got slammed as investors began a rush for the exits. The Caixin flash manufacturing PMI slipped to a 77-month low at 47.1 in August, the Wall Street Journal reported.
  • Technical factors: The S&P 500 is now trading below its 200-day moving average. For technical traders this is a key long-term "line in the sand." When the market is above the 200-day moving average it is a long-term positive signal, and conversely when the market is trading below the 200-day moving average it is a long-term negative signal. A "death cross" is seen on the DJIA, which means its 50-day moving average has crossed below its 200-day moving average line.

Key takeaway for gold: stock market declines could continue to drive safe-haven and risk aversion demand into gold or other precious metals.

2. Odds shift away from September Fed rate hike. Eight months into 2015, the U.S. Federal Reserve still has been unable to deliver on its long-announced intentions to begin raising interest rates from the zero bound level. The federal funds rate has been stuck at zero to 0.25% since December 2008 —when the global financial crisis was beginning to hit. Concerns about the tepid inflation picture in the U.S. along with heightened uncertainty about the health of the global economy decrease and plunging stock prices decrease the odds that central bankers will move to raise interest rates. Credit Suisse issued a report this week saying they believe the probability of a September hike in the fed funds rate has slipped below 50%.

Key takeaway for gold: zero bound U.S. interest rates equals massive monetary policy accommodation, which is a positive for the metal.

3. Long-term investors are accumulating gold. Central banks are perhaps the most influential and significant of all long-term investors. When they look to buy gold it is not for short-term plays, it is for the long-term, a decade or more long of portfolio diversification and reserve building. And, central banks are still buying. Recent data released by the People's Bank of China revealed that China increased its official gold holdings to 1,677 tonnes in July or a 1.2% jump from June. China now boasts the fifth largest gold holdings in the world.

Key takeaway for gold: It's not just China that is buying gold and this trend is expected to continue. Over the last five years, central banks comprised on average about 10% of total world gold demand, and many analysts forecast that trend to continue or increase, especially as emerging markets look to diversify assets away from the U.S. dollar.

Bottom line. The winds are shifting. As of late August we are heading into a seasonally bearish period for U.S. stocks while gold is heading into a seasonally bullish period. Plan your trade and trade your plan.

By Kira Brecht,
Follow her on Twitter @KiraBrecht



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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