Gold analysts debate whether to buy dips in December

Gold is up about 60% this year, but a recent change in tides has investors wondering if they missed the boat on this rally.

The precious metal hit all-time highs near $4,400 per ounce in mid-October before backtracking more than 10% by Halloween. It’s now back in the $4,200 per ounce range.

That kind of action will get even a staunch gold bug to wonder if it's time to back off, and the volatility scares average investors into thinking that there’s more downside risk than upside potential.

With gold, like the stock market, about to finish its third consecutive positive year, every downturn triggers fear-and-greed reactions: (1) Buy the dips, and (2) get out before the trend reverts to the mean, and you lose the new shirt you got from the gains.

In a market where plenty of experts are saying “the trend is your friend,” gold has had a particularly friendly trend. As measured by the SPDR Gold Shares (GLD), gold is up 32% annualized over the last three years. Boosted by a gain of 58% in the last 12 months, the long-term average return is nearly 14% annualized over the last decade.

That's just a hair below the annualized average return of the Standard & Poor’s 500 over the same period.

The issue is that gold, historically, is much more volatile than equities, and the GLD’s 15-year trailing returns are just over 7% annualized or roughly have what the S&P has delivered over the same period.

Chris Vermeulen, founder and chief market strategist of The Technical Traders, says that investors are right to be wary, but also right to expect more from gold.

Gold may signal something 'big bad'

In an interview on “Money Life with Chuck Jaffe,” Vermeulen said the markets have been rolling, with “the only real warning sign out there” being precious metals.

“Gold, silver, platinum, and platinum are all rocketing higher, (but) they generally are a little bit of a warning sign that something kind of big bad is brewing in the markets,” Vermeulen said, noting that equities and precious metals both showed big gains in 2007, heading into the Great Financial Crisis. “I am worried there's going be some type of news or event that's going to cause a big sell-off, but you definitely don't want to fight the trend in equities.”

Vermeulen, who started his firm in 2000, won’t hazard a guess as to what the bad news trigger could be; he just sees “gold as kind of a barometer of global fear and they want to move money away from the financial system and get their golden pet rocks kind of as protection.”

That uncertainty about what will break the trend or when is why Vermeulen isn’t abandoning gold’s upward trend, especially when gold could be a defensive play if/when nervous investors decide to exit stocks.

"I think gold has got about a 25% to 27% upside move from here over the next one to two months, Vermeulen said. "Silver could rally about 50 plus percent over the next couple of months. That's just what the charts are pointing to."

“But, based on all that, once these moves happen, I think you need to really step aside and sometimes cash is a very good play."

Gold bugs line up to buy the dip

Vermeulen is far from alone in liking precious metals here. In fact, after his interview on the May 18 Money Life, Joe Quinlan, head of market strategy for Merrill Lynch, said that he —  like Vermeulen — sees trouble ahead for the stock market but isn't backing
away from metals.

“I think gold can continue to run here,” Quinlan said. “If you missed the first bite at the apple, take another swing at it … because sovereign debt levels globally are very high off the charts.”

Goldman Sachs recently revisited its gold outlook and was largely bullish because lower Treasury yields make government paper less attractive as a safe-haven alternative to gold, and because gold is priced in U.S. Dollars, weakness in the greenback makes gold more affordable to foreign buyers, including central banks.

Vermeulen sees stocks moving lightly higher into the end of the year, but prefers the potential in gold

“There’s potential with the S&P 500 that we can see it rally up to about 7,100 and change, about another 6%, 7% upside,” Vermeulen said. “We do have the seasonality on our side, typically from really the second week of November to the end of the year, we see stocks push higher for that holiday rally. So there's some nice upside there.

“In terms of the precious metals side,” Vermeulen said, “gold is the same. It has a tailwind. It has seasonality-wise pushed higher to the end of the year. It’s got about a 25% move and could rally to about $5,200 per ounce. The markets are still looking really good.”

Related: Manager of $24 billion gold ETF sets 2030 price target