Is the Market Rally After Bernanke’s Speech Here to Stay?

Ben Bernanke’s signal on August 31 that more quantitative easing may be on its way in the world’s biggest economy helped provide relief to global stock markets, which have risen since then. The Toronto Stock Exchange’s S&P/TSX composite index (TSX:OSPTX) gained 62.61 points, or 0.53 percent, to close at 11,949.26 on Friday. The rally continued in Europe on Monday with the German DAX, the French CAC and the UK’s FTSE 100 all recording gains.

FTSE 100’s gain on Monday was mainly due to the resources sector, with shares in Randgold Resources (LSE:RRS), the West Africa-focused gold miner, up 1.7 percent to £64.25, while Mexican precious metals miner Fresnillo (LSE:FRES) topped the FTSE, climbing 4.2 percent to £16.27.

The speech by Bernanke, the US Federal Reserve chairman, on Friday also helped lift gold prices to a five-month high. Major players like Barrick Gold (TSX:ABX) and Goldcorp (TSX:G) each gained more than 3 percent, Yamana Gold (NYSE:AUY) jumped 4.3 percent and a slew of juniors jumped even more. Oil and copper prices also rose, lending support to the energy and materials companies that make up a large portion of the Canadian exchange.

The rally in the gold sector, however, did not start right after Bernanke’s speech to the annual central bank conference in Jackson Hole, Wyoming. It had been going on for about two weeks before the meeting, especially among juniors with large gold deposits in the 5-million ounce plus range, one mining media outlet reported.

“Generally speaking, the share prices of such juniors had dropped to Hades-plumbing lows in May, June and July,” wrote Mineweb. “Yet in the past two weeks or so, many of them made a quick climb. With heady shareprice heights from last year for comparison, if these junior souls were six feet under in July, then they are now back up around four or five feet. Under still, but digging out.”

The article notes the “simple” explanation would be that the price of gold has done well in recent weeks, acting as a catalyst for junior minors. But creative financing deals to fund mining projects have also boosted the share prices of junior miners.

The S&P/TSX Composite index is down about 5 percent in the past year. In the same time, the S&P/TSX Venture exchange has fallen about 32 percent. While both these indices are down for the year, they have been rallying in the past few weeks. Barrick Gold has risen about 17 percent in the past month. Kinross Gold has risen about 16 percent.

The rally that has taken hold in the past two weeks could stay if there is more progress on structural and fiscal reforms in Europe and more easing from the Fed. Forbes reported that the market is waiting to see the policy actions by the Federal Reserve and the European Central Bank, both of which are critical in the path of the U.S. dollar and equities, and by association, gold.

A sense of progress on these issues will have the potential to be bullish for equities and might drive renewed investor enthusiasm for gold that could see the metal trade up to and beyond the $1,700 mark, according to Forbes.

Whether the rally is here to stay or not, financial writer and editor Bryan Borzykowski says the time has never been better to buy equities even though the events of the past few years have made investors wary of stocks.

In a recent article, Borzykowski wrote that we will experience ups and downs for the next year, or longer, but markets will rise over time. “Stop watching the daily fluctuations and don’t worry: It’s likely you will make money in the market.” He added that in 2008, many companies were carrying way too much debt. Others were spending exorbitant amounts to run their business.

“It’s a different story today. Many companies have trimmed the fat, paid off their lines of credit and restructured debt and are more conscious of where each dollar is going,” he stated. “Not only are companies still profitable, but they’re more financially sound than ever before. Overall, the chance of a bankruptcy has decreased dramatically since the recession.”

Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.