2016's Top Performing Sector

There is no suitable day to write a 2016 prospect about gold market than December 31, 2015. Adam Hamilton did this when he wrote his article, Fueling Gold's 2016 Upleg on last year's final day. After reading his article, my conviction has been strengthened that I made the right decision when I bought shares of a gold stock the day the price of gold went down in anticipation of FFR hike. In this article, I just want to share five key insights that I got that made our writer conclude that "gold stocks should be 2016's top-performing sector."

1. The price of gold suffered big blow as a result of QE3. Gold's average price in 2012 according to Hamilton was 1169 USD per ounce. Since then, its price went down as the Fed started manipulating traders' sentiment with its "open-ended" QE3, meaning a QE that "had no predetermined size or end date." With the uncertainty brought by QE3, both gold speculators and investors turned bearish on gold as a result of capital migration levitating the stock market. So far, such sentiment could be justified. What's illogical for Hamilton is the continued belief of both speculators and investors that even the gradual decline of QE3 that finally ended on October 2014 was still bearish for gold. He asked: "If the largest inflationary event in world history was ludicrously very bearish for gold, then why would the end of QE3 prove bearish as well?"

2. The recent FFR hike is bullish for gold. Adam Hamilton studied the performance of gold in relation to Fed's rate-hike cycle since 1971. He came to the conclusion that gold performs best when FFR entered near gold's secular lows, and rate increase is gradual. And such is the case that we have right now. 

3. FFR increase will demolish the false basis for selling gold. As already noted, gold bearish sentiment is irrationally based on both QE 3 and its cessation. And then the rate hike was added as additional basis for such emotional response. However, contrary to expectation, the price of gold did not collapse after the Fed decided to end 7 years of ZIRP last December 16. Hamilton describes it this way; ". . .the Fed actually hiking rates for the first in 9.5 years, ending 7 years of ZIRP, will serve as the acid test to shatter these false notions."

4. Normalization of gold prize this 2016 is inevitable. As both speculators and investors will realize that FFR increase won't slaughter gold, this will cause them to return.

5. There are three stages of gold buying that will take place in the coming months and years. The first stage will be initiated by gold futures short speculators; the second stage by gold futures long speculators, and; the third stage by gold investors themselves. 

Though I didn't completely understand the numbers involved in Hamilton's computation, what follows are the only numbers that made sense to me. He said that in order for gold futures short speculators to cover their shorts, they have to purchase 102.1k contracts or 317.6 tonnes of gold, which is a 139% increase in gold demand. As for gold futures long speculators, they need 98.8k contracts or 307.2 tonnes. And then finally as for gold investors, in order to change the 0.115% "ratio of the value of GLD's holdings to the S&P 500's collective market" to 0.475%, they need to increase their holdings more than four times. 

Reading financial information like this, I think it's better to position oneself as early as this time before this 2016 gold rally starts.