Friday, November 7, 2008
Is It Really Time to Invest in Gold?
NEW YORK—Gold prices reached an all-time high at a little above $1,000 per ounce days after investment bank Bear Stearns collapsed, and it has steadily declined since. These days, gold prices tend to fluctuate between $700 and $800 per ounce.
With the stock market in a tailspin much of the last two months, analysts expected gold prices to take off as stock investors search for a safe haven. But the exact opposite effect manifested, leaving commodities traders and investors searching for answers.
Analysts have different theories about why gold isn’t as high as it should be. But most believe that it is a solid investment nonetheless, amidst a market which isn’t expected to rebound in the immediate future. After all, unlike your local savings bank, gold could never go bankrupt.
The biggest reason for gold’s sluggish growth mentioned by analysts is a sudden strengthening of the U.S. dollar against most other currencies, due to an imminent economic recession in many European and Asian countries. Gold typically is a hedge (protection) against dollar devaluation, and a strengthening dollar kept gold prices in check.
The Gold and Silver Blog (GSB), an online depository of information and analysis for commodity investors, proposed several reasons for gold’s modest valuation, including a collapse of the commodities market and weak demand due to economic woes around the globe.
“Since the summer months, commodities have been on the rapid decline. Oil has fallen by more than half from its peak price of $147,” the report said.
Other precious metals such as silver and nickel have also been hurt. While gold is holding steady, its prospects nevertheless have been dampened by the overall commodities market.
A second reason cited by GSB experts is a weakened demand for gold. Production of jewelry, watches, and other luxury items is the largest non-investment demand for gold. As consumer discretionary spending declines, sales of such luxury items will likewise falter.
Whatever the case may be, some investors are simply sitting on their cash. The stock, bond, currencies, and commodities markets have taken such a hit that some investors may be reluctant to put their money in any type of investment.
But some analysts, such as Francisco Blanch from Merrill Lynch & Co., predict a big comeback for gold, oil, and other commodities. In a research report to clients last week, Blanch wrote that oil could top $150 per barrel, and gold could increase to $1,500 per ounce. He did not provide a timetable for reference.
History seems to support that conclusion. Gold prices typically climb during times of inflation, loose monetary policy, and an increased money supply. The U.S. Federal Reserve’s recent financial bailouts and printing of money seem to suggest that we may be headed toward that direction.
In the end, gold is subject to speculation and market turbulence like all other commodity investments. As experts weigh in with their opinions of investing in gold, investors should take solace in the following: currencies, banks, governments, and even civilizations have come and gone, but gold has always maintained its value—more or less—for the past five thousand years.
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Wednesday, November 5, 2008
Why precious metals look set for a winter rally
We'll start with the Commitment of Traders (COT) Report. One of the more reliable indicators for the short- to medium-term direction of gold and silver, and indeed any commodity, is to see what position traders are taking on Commodities Futures Exchange (the world's largest exchange) in New York.
Traders are divided into three categories: commercials, large traders and small speculators. The simplified wisdom is that the large traders are the ones who get it wrong, while the commercial traders are the ones who get it right.
The commercials are often hedging miners' future gold production, and will often be short (betting the market will fall), while the large traders tend to be on the long side (betting the market will rise). The trading strategy is as follows: the more open interest – i.e. open positions – the more likely it is we are near a top; the less open interest, the more likely it is we are near a bottom. The more the large traders are long, the more likely the top, the less the commercials are short, the more likely the bottom.
Below is a weekly chart of gold for the last five years with, underneath, the positions taken by traders on the Comex. You can see that at the moment, the commercials have dramatically cut their short positions and the large traders their long positions to levels where significant market bottoms have previously taken place. The arrows I've drawn show previous bottoms and the corresponding positions of the traders.
The set-up for silver is even more bullish. In fact, it's as bullish it's been for five years or more.
Remember the COT Report is just one indicator and, as we have seen over the last few weeks, pretty much anything can happen in markets. The larger trend in silver is very much down from the highs of last spring, but the shorter-term picture for the next few months looks very bullish. I believe a rally to $14 or even $17 is very much on the cards.
We have also seen some very nice moves in some of the silver companies such as Silver Wheaton (NYSE:SLW) and First Majestic (TSE:FR) with some of them up almost 100% from their lows of last week, which bodes well.
It's also the time of year to buy precious metals
Seasonally, October is a time to sell gold and this year was no exception. But late October, early November is a good time to buy back, as you will usually get some kind of rally into the year end and often into Spring. The chart below from Nick Laird at ShareLynx (a site, by the way, which has some superb charts) shows the seasonal tendencies:
Since 2007, gold and silver have outperformed gold and silver stocks. In other words, you'd have been better off owning the metal. But the ratio of the metals to the miners has reached extreme levels. In fact, the most extreme levels since 2000-01, at the very bottom of the market. This extremity suggests we could be entering a period when stocks will outperform the metals.
Keener readers will remember a fortnight ago that I reported that we are close to a sell signal in gold and silver, according to the strategy I outlined here: How to make money from markets you know nothing about. However, often when you get such a signal, it's a good idea to wait for the chart rise back to its 52-week moving average and then review the situation (it doesn't always happen, of course). In this case, this would mean a return to silver at around $15.50 and gold at $870. I'm confident we'll get there before too long.
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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