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The Hard Assets Alliance Blog

Gold Price Outlook Showing Positive Signs

After having its worst year in three decades, gold has recaptured its luster in 2014 by climbing 8% since the beginning of the year. The rally lost some momentum recently, but gold is still outshining the S&P 500, which is essentially flat for the year.

The ingredients for a rejuvenated gold bull market are certainly in place. Currency debasement and rising debt are still in full swing across the globe. Despite supportive fundamentals, markets sometimes defy logic, as was the case last year.

Like most of our readers, we are holding gold for the long haul. Still, even patient and disciplined investors like to know if a correction is looming or if a buying window is about to close. With this in mind, we shift our attention away from the big picture for a moment to consider two other indicators that also happen to hint at an improving price outlook for gold.

Paper Market Hints at Muted Downside Price Risk

Accurately forecasting the distant future is not easy. Occasionally though, the immediate future proves more difficult to predict. This could end up being the case for gold, which appears to have its secular fate sealed. Simply put, when you add the massive expansion of fiat money supplies to the finite nature of a resource like gold, it's a formula for eventual price appreciation.

Even so, many investors lose sleep over gold's weekly and monthly price swings. Seeing the writing on the wall, we try not to get too concerned with this interim noise, though we do listen for possible changes in investor sentiment.

At this time, the paper gold market—which includes gold futures and exchange-traded funds (ETFs)—is reflecting an improving outlook by Western investors. The number of net long positions for gold futures stood at 98,492 on April 8, 2014, or more than triple the six-year low of 26,744 contracts that were recorded on December 3, 2013. Holdings of gold funds have also steadily risen since the new year, indicating that investors are once again eyeing this asset class.

Longtime readers may recall past articles where I discussed the waning importance of the paper gold market in the evolving international gold market. This is still the case, since these markets are dominated by fear and greed-induced speculation, rather than fundamentals. Still, these markets can occasionally help investors secure better prices than could be had by simply paying attention to the big picture.

Deal-Making and Capital Flow Poised to Rise: Will the Price of Gold Follow?

As devastating as last year was for gold, things were even uglier for gold miners. Juniors and majors alike experienced tighter cash flows due to price softness and volatility. Many miners had to suspend capital investment and expansion plans in order to control costs. Consequently, merger and acquisition (M&A) activity in the space fell dramatically. According to Bloomberg, deal value for the industry sank to $10.1 billion last year, which was the lowest level since 2004.

Deal-making has rebounded in 2014 due to stronger gold prices and renewed confidence. Most deals this year have been smaller than usual, thanks in no small part to tighter financing. The number of financings in the junior miner sector have doubled since October. Many analysts attribute this to a broader industry transformation that's expected to include more joint ventures than outright acquisitions going forward, as companies aim to share risks and reduce costs.

That being said, a handful of headline-grabbing deals have either recently closed or been proposed. Just last week, Goldcorp (GG) raised its offer to purchase miner Osisko (OSK.TO) from $2.6 billion to $3.6 billion after entering a bidding war with Yamana Gold (AUY). The deal has yet to close as of this writing. Overall M&A activity is projected to increase in 2014, according to PricewaterhouseCoopers and Ernst & Young.

Investors are also returning to the industry. As Jeff Clark of Casey Research reported back in March, famed investor Rick Rule of Sprott Global "absolutely" expects more money to flow into the mining space this year. Private equity groups are one new source of funding for the industry. According to Bloomberg, private equity groups spent around $9 billion on mining assets over the past 18 months.

The expectation of stable or rising prices isn't the only factor driving deal-making. Just as many deals are likely to occur out of necessity as due to opportunity. Still, it's unlikely that producers would be putting so much capital on the line if they were worried about substantial downside price risk.

While the developments covered today fall outside of our typical fundamental analysis, they have an important message for us about gold's current affairs. Most notably, the sentiment of several different market participants appears to be improving as downside price risk retreats.


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