(By Michael Vodicka) Gold is the hottest story on the Street. In a rare break from its typically bullish from, gold is off to a terrible start in 2013, down 7% on the year and 4% in just the last five days. This has the anti-gold crowd coming out of the woodwork, doing cartwheels at a chance to bash the bullish trend that just logged its 12 winning year in a row.
But once again, the naysayers have it completely wrong. This may be a pullback or even a correction in the gold market, but it does not signal the end of gold's triumphant march higher or that it's time to sell and take profit. In fact, it's just the opposite. The recent bout of weakness is a rare chance to buy the precious metal on a pullback. And there are 6 very good reasons for that. Here they are.
Charts Do Not Matter
The big slam against gold is the "death cross" formation, with its 50-day moving average crossing below its 200-day moving average. Let me share a badly kept Wall Street secret with everyone. Technical analysis doesn't work. Yes, it's fun to watch to get a read on short-term price action, but that's as far as its value goes. That's why you don't see a single technical analyst on the list of America's richest people.
Another reason gold has been selling off so hard in the last few days is because the Fed said it will review its QE program at its meeting in March. That has many thinking the most powerful central bank in the world is thinking about reeling in its monetary medicine. That is laughable. The Fed is stuck. It can't stop. We are living in a centrally planned and controlled economy. If the Fed stops, the market and the economy crashes and it's that simple. Which means even if the Fed had the political will to tap the breaks, it simply can't because the market has become so reliant on its easy money.
Global Central Banks
Other central banks all across the world are in the exact same situation. That includes the Bank of Japan, Bank of Australia, the Bank of China and the Bank of England. All these central banks have pushed a river of liquidity into the market in the last four years to weaken their currencies and stimulate exports. None of them can stop or it's game over for their economy. This kind of strong fundamental support is exactly what I look for in my premium newsletter, the "iStock Growth Trader (click link for free 30-day trial)," a biweekly newsletter that provides exclusive access to all my best trading and investment ideas.
No Sign of Inflation
The data may be manipulated, but as far as the numbers go, there is absolutely no sign of inflation on the Street. That gives the Fed and other central banks around the word all the leeway they need to keep pumping liquidity into the market to support gold and commodity prices. As long as wages remain low and unemployment high, there is almost no chance of inflation.
Bull markets never end with a whimper or pessimism. Bull markets die when every single person you know is in the trade and ridiculously bullish. Think about housing and the Nasdaq. At the height of both, granny next door was both an expert at trading Internet stocks and flipping houses. And we both know how both of those trades ended. Gold is the most hated trade on the Street. Not until it becomes popular will we be even close to a top in gold.
Gold Holds its Value
A lot of people like to say that gold doesn't generate any income, but I disagree. Back in 1900, an ounce of gold could by three nice suits. And today, 100 years later, an ounce of gold at $1550 can buy three nice suits. Gold is the ultimate hedge against government spending gone wild.
Downside: The dollar has been strengthening a bit lately as other central banks across the world work feverishly to weaken their currencies. Although I view that as temporary, dollar strength is a threat to gold.
Price Target: Gold is off to a terrible start in 2013. But there are six very good reasons why this is an opportunity to buy on a rare pullback. With the global economy fully addicted and dependent on easy money from the global central banks, I expect gold to hit an all-time high above $2,000 by the end of the year.