By Dominic Frisby
Fans of The Da Vinci Code, mathematicians, technical analysts, believers in the supernatural, even some bee-keepers and rabbit-breeders – they all know their Fibonacci numbers. This is an almost-magical sequence of numbers first described in ancient Sanskrit mathematics and introduced to the West by one Leonardo of Pisa, aka Fibonacci.
What gives this sequence its perceived ‘magical’ power is that the pattern repeatedly appears throughout nature, for example in the branching of trees, the arrangement of leaves on a stem, even in the spirals of florets on a sunflower. Pine cones, pineapple fruitlets, artichoke flowers, the family trees of honeybees - all show Fibonacci patterns in their arrangement.
What’s this got to do with finance? Well, it’s claimed that this same pattern is also discernible in markets. First I’ll explain the theory – bear with me – then we’ll look at how it may apply to today’s markets.
How the Fibonacci sequence works
Each number in the Fibonacci sequence is the sum of the previous two numbers. That means the first 20 Fibonacci numbers are:
0 1 1 2 3 5 8 13 21 34 55 89 144 233 377 610 987 1597 2584 4181 6765
Each number in the sequence is roughly 1.618 times greater than the previous number. And if you divide one number in the sequence by the number that comes after it, the ratio is consistently about 61.8%. For example, 8/13 = 0.6153, or 21/34 = 0.617.
This ratio, 61.8%, is known as ‘the golden mean’. Other key ratios are 38.2% (found by dividing a number in the series by the number two places to the right) and 23.6% (found by dividing one number in the series by the number three places to the right).
You will often find in the markets that a bullish major trend will suffer a bearish retracement to a key Fibonacci ratio, and vice versa. What does that mean? Well, for example, if an index rises 100 points from 100 to 200, it will often then retrace to a key Fibonacci level – that might be 61.8%, 38.2% or 23.6% of the move. So the index might then pull back from 200 to 161.8.
But does it really work?
Let’s take a look at this in practice. I picked two markets at random – the gold price and the Dow Jones index.
The Dow went from a low of 600 in 1975 to a high of 12,000 in 2000. That’s an 11,400 move. It then corrected. If it were to have corrected to a level that is 61.8% of that 11,400 move, it would have gone to about 7,045. In fact, it went to just below 7,200 in October 2002.
In gold’s recent great bull run, we went from a low of $250 in 1999 to a high of just below $1,030. That is a move of $780. If we look at likely Fibonacci levels to which gold would retrace from that high (i.e. possible buy-points), you get the following:
$780 x 61.8% = a correction of $482
$780 x 50% = a correction of $390 (though not a Fibonacci number, 50% is also a figure that is used, for obvious reasons)
$780 x 38.2% = a correction of $298
$780 x 23.6% = a correction of $184
A correction of 38.2% of that $780 move – in other words a reversion to a point that is 61.8% – takes us to $732 ($1030 - $298). And in fact, last week gold touched just below $740. As the May 2006 high, and also an important support level in 1980, it’s an obvious area for gold to find a low.
Now it would be easy to dismiss all of the above as mumbo jumbo, were it not for the fact that these ratios occur everywhere and with such frequency. And I would never advocate Fibonacci patterns as a sole reason for making an investment. They are, however, useful as a secondary trading tool. You may well have decided that you want to buy a stock or commodity for sound fundamental reasons, but Fibonacci numbers can help you to decide on the best time to do so.
But sometimes, of course, technical analysis goes out of the window. At one stage yesterday, by Asian trading, gold was up some $100 in a single day! It was gold’s greatest day’s trading ever.
Was this the mother of all panics? The mother of all short-covering rallies? Who knows, but it was a great day to be long. You can read more about why demand for physical gold is surging in this week’s MoneyWeek cover story, along with an update on my junior mining tips from the past year or so.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Thursday, September 18, 2008
Tuesday, September 16, 2008
Where now for oil and gold?
Sir John Templeton died on 8 July, aged 95. He was, throughout his life, a great investor. He was also famous for the following quotation: "Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria."
The late Sir John's famous quote encapsulates the current condition of the commodity and energy sectors. We have to ask ourselves: Are the bull markets for gold and oil over and are they now primary bear markets?
Firstly, the gold market
Born on pessimism
At the start of the bull market for gold, prices were at a twenty year low of about $250 oz, having been in a bear market since 1980. That particular low became known as 'Brown's Bottom', because Gordon Brown marked it by selling a large percentage of Britain's gold reserves at the bottom.
Grow on scepticism
We first invested into the gold story in 2001, most people thought we were mad. How's that for extreme scepticism?
Mature on optimism
As time moved on, holding gold-related investments as a long-term investment became more accepted, particularly as the dollar swooned. The credit expansion also provided fertile ground for its popularity. Gold-related investments prospered and the subsequent credit crisis added further weight. After all, gold is said to be non-correlated with everything, especially stock markets.
Die on euphoria
The euphoria stage is when the price rises higher and faster than ever before. This could mean for gold a doubling of the price in a matter of months. Has there been euphoria? The answer is 'no'. The majority of investors do not hold gold bullion or gold-related investments as part of their portfolios. You can do your own market research to establish that fact. Talk to people and ask them if they hold gold and you will find the vast majority do not.
Interestingly, the most recent news has been very positive. According to Reuters, the president of Bombay's Bullion Dealers Association said that in August India imported 100 tonnes of gold bullion, which compared to 22 tonnes in July and 67 tonnes in August 2007. It is the time of year when India's demand for gold burgeons but the demand this year has been much higher than usual.
We strongly suspect, at present, that prices are being pushed around by short-term speculators to such an extent that gold is now seriously oversold. So we would certainly expect, in the near term, a strong rally, if not a recovery. Our view remains that the bull market for gold is still intact and that euphoria patiently awaits us in the future.
So far, pullbacks have been worse than expected but the gold price is now where, if you believe the story - and we do - you buy gold-related investments. So for the moment it would seem sensible to maintain exposure.
Secondly, the oil market
Born on pessimism
The oil price, at its lows, was $10 a barrel and as recently as December 2001 traded as low as $17.80 a barrel. Oil companies could not afford to invest, the market was very pessimistic.
Grow on scepticism
So far, the market has continually expressed its scepticism about the oil price by never re-rating equities in line with the market price for oil. As we explained in the previous issue, number 578, even now with oil at about $100 per barrel, oil shares reflect a medium to long-term oil price of only $53-$60 per barrel.
Mature on optimism
There has been a measure of optimism about higher future oil prices, quite rightly because it is based on the fundamentals of growing Chindia demand and long term supply issues. Over time, we don't doubt that growing optimism will manifest itself and the oil price will head meaningfully higher.
Die on euphoria
Still in the future
The energy market is unquestionably suffering on the back of the global economic slowdown and demand destruction. Although the long-term bull market, in our view, remains secure. However, if there is more weakness before support comes in and the $100 per barrel level doesn't hold (using a thick pencil) we will look to close energy positions. If that happens, we will monitor the situation, expecting in due course to buy back at a lower level.
As far as the gold and energy markets are concerned, we think the following quote from the newsletter The Rude Awakening is apt: "The trick is to know the difference between a bad investment that deserves to fall and a good investment that doesn't." We would maintain that our view is correct in believing that this sector falls into the second half of that quote.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
The late Sir John's famous quote encapsulates the current condition of the commodity and energy sectors. We have to ask ourselves: Are the bull markets for gold and oil over and are they now primary bear markets?
Firstly, the gold market
Born on pessimism
At the start of the bull market for gold, prices were at a twenty year low of about $250 oz, having been in a bear market since 1980. That particular low became known as 'Brown's Bottom', because Gordon Brown marked it by selling a large percentage of Britain's gold reserves at the bottom.
Grow on scepticism
We first invested into the gold story in 2001, most people thought we were mad. How's that for extreme scepticism?
Mature on optimism
As time moved on, holding gold-related investments as a long-term investment became more accepted, particularly as the dollar swooned. The credit expansion also provided fertile ground for its popularity. Gold-related investments prospered and the subsequent credit crisis added further weight. After all, gold is said to be non-correlated with everything, especially stock markets.
Die on euphoria
The euphoria stage is when the price rises higher and faster than ever before. This could mean for gold a doubling of the price in a matter of months. Has there been euphoria? The answer is 'no'. The majority of investors do not hold gold bullion or gold-related investments as part of their portfolios. You can do your own market research to establish that fact. Talk to people and ask them if they hold gold and you will find the vast majority do not.
Interestingly, the most recent news has been very positive. According to Reuters, the president of Bombay's Bullion Dealers Association said that in August India imported 100 tonnes of gold bullion, which compared to 22 tonnes in July and 67 tonnes in August 2007. It is the time of year when India's demand for gold burgeons but the demand this year has been much higher than usual.
We strongly suspect, at present, that prices are being pushed around by short-term speculators to such an extent that gold is now seriously oversold. So we would certainly expect, in the near term, a strong rally, if not a recovery. Our view remains that the bull market for gold is still intact and that euphoria patiently awaits us in the future.
So far, pullbacks have been worse than expected but the gold price is now where, if you believe the story - and we do - you buy gold-related investments. So for the moment it would seem sensible to maintain exposure.
Secondly, the oil market
Born on pessimism
The oil price, at its lows, was $10 a barrel and as recently as December 2001 traded as low as $17.80 a barrel. Oil companies could not afford to invest, the market was very pessimistic.
Grow on scepticism
So far, the market has continually expressed its scepticism about the oil price by never re-rating equities in line with the market price for oil. As we explained in the previous issue, number 578, even now with oil at about $100 per barrel, oil shares reflect a medium to long-term oil price of only $53-$60 per barrel.
Mature on optimism
There has been a measure of optimism about higher future oil prices, quite rightly because it is based on the fundamentals of growing Chindia demand and long term supply issues. Over time, we don't doubt that growing optimism will manifest itself and the oil price will head meaningfully higher.
Die on euphoria
Still in the future
The energy market is unquestionably suffering on the back of the global economic slowdown and demand destruction. Although the long-term bull market, in our view, remains secure. However, if there is more weakness before support comes in and the $100 per barrel level doesn't hold (using a thick pencil) we will look to close energy positions. If that happens, we will monitor the situation, expecting in due course to buy back at a lower level.
As far as the gold and energy markets are concerned, we think the following quote from the newsletter The Rude Awakening is apt: "The trick is to know the difference between a bad investment that deserves to fall and a good investment that doesn't." We would maintain that our view is correct in believing that this sector falls into the second half of that quote.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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