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Central Bank Stimulus Would Rally Gold ETFs

tlydon@globaltrend.com (Tom Lydon)

The big rally in gold ETFs on Friday after the bleak U.S. jobs report is a reminder that the precious metal could get back on track if central banks step in with more stimulus.

Gold prices climbed back above $1,600 an ounce as the jobs disappointment raised expectations of additional quantitative easing from the Federal Reserve. [Fed QE Speculation Boosts Gold ETFs]

“Despite recent U.S. dollar and commodity corrective headwinds, the combination of positive macro, micro and technical drivers should allow gold prices to rebound and achieve new highs during the next 12-18 months,” Sterne Agee analysts said in a note. “Friday’s market reaction to added U.S. economic uncertainty raises the prospect of further monetary stimulus; gold prices should better reflect such actions.”

Gold ETFs such as SPDR Gold Shares (GLD - News), ETFS Physical Swiss Gold Shares ETF (SGOL - News) and iShares Gold Trust (IAU - News) are up about 4% year to date.

Technical analyst Tarquin Coe at Investors Intelligence says GLD has finally rallied from horizontal support at $150 a share. “If this marks a move up from the bottom of the nine month range then a visit to the $175 region could occur over the next couple of months,” he said.

From a fundamental perspective, Sterne Agee said expansive government balance sheets, slowing economic and job growth, and stress in financial markets “should provide a bid for gold.” Record low U.S. and German bond yields “signal deflationary trends that centralbankers will be unable to ignore.”

The analysts also like gold miner shares. Miner ETFs have bounced since mid-May following a brutal losing streak. [Have Gold Miner ETFs Finally Reached the Turning Point?]

“We have found precious metal equities to be quite underowned and underpriced,” Sterne Agee said. “Despite many precious metals equities enjoying one of the best price movements on Friday, we believe investors have yet to fully recognize the relative attractiveness of these shares given the sharp price correction seen since February 2012, above-average dividend yields and prospects of improved cash flow generation.”

SPDR Gold Shares

Market Vectors Gold Miner ETF

Full disclosure: Tom Lydon’s clients own GLD.