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« SKOT Makes 49.40% in 7 Days Trading SPY Call Options | Main | Gold at $2000? »
Monday
Sep012014

Gold: The thin end of the wedge

Background

Gold had a horrendous year in 2013 disappointing many of its supporters; however, 2014 started brightly bringing with it much hope for an attempt at achieving new record highs. Gold prices moved quickly from the $1200/oz level to flirt with $1400/oz by mid-March. The summer brought some confusion with gold rallying and falling without much in the way of conviction in either direction. As optimists we can argue that the summer doldrums arrived to take the steam out of the market and that better times lie ahead. The pessimists suggest that gold is struggling to gain some traction and will head lower in the near future, so we will take a brief look at some of the factors that affect gold’s movements.

Factors for consideration regarding the purchase gold: 

Back in June 2006 we listed some the reasons for buying gold as follows;

· No new large discoveries of gold deposits dampening supply
· Lack of previous investment for gold exploration
· It takes up to 10 years to bring a new mine to production
· Falling gold production worldwide adding to its scarcity
· Gold EFTs take gold off the market thus reducing supply
· In the last Bull Run 70s to 80s gold prices increased 20 fold
· Metrics: DJIA vs. Gold, about 19ozs buys the Dow Jones, it has been 1:1 in the past and could be again in the future. Assuming the Dow Jones remains above 10,000 then the gold price could hit $10,000
· Gold at its previous high of $850 adjusted for inflation puts the gold price at $2000 plus
· Geopolitical uncertainty, a nuclear Iran creates world tension which pushes up the price of gold
· A Dictatorial South America imposing restrictions such as increased taxation and nationalization will deter investment and reduce gold production
· India is growing and the sleeping dragon of China has awoken, their hunger for gold will drive gold prices higher
· Internet: information travels around the world in a nano-second, reactions to news, true or false, will add to the volatility of the gold price
· Web trading: increasing every day, resulting in the trends being more exaggerated than ever before
· The mania that I traded in during the last Bull market will be nothing compared to the coming Gold price explosion and the maniacal actions of traders and everyday people in the precious metals sector.

No doubt our readers can add many more reasons to the above list but you’ve got the drift. Back in June 2006 gold was trading at $450/oz, so since then its value has increased threefold to today’s price of $1300/oz. If we compare gold’s progress to that of the DOW we can see that back in June 2006 the DOW was trading at approximately 10,000 so in the same time period it has failed to even double in value. We think that it is fair to say that gold has performed very well over this time period.

Can gold continue to outperform other asset classes going forward making it the darling of the investment community you ask? Well, it’s not all plain sailing as the precious metals sector faces a number of head winds that will have to be overcome if we are to see record highs for both gold and silver in the future.

Gold produces no income, gold is taxed unfavorably in some countries, gold is overbought today, almost all the gold that’s ever been mined resides in vaults ready for resale, gold is not a safe haven as it can be confiscated, these are a few of the usual arguments against investing in gold.

The printing of money either via QE or otherwise by a number of nation states has served to dilute the value of those currencies including the US dollar. In the US this programme in now being tapered and the indications are that it will come to an end in October. The coming of the end of QE has seen the dollar improve especially over the last 3 months, having increased in value from 79.00 to 82.72 or 5%. If the dollar continues to strengthen then it will hamper gold’s ability to rally, in dollar terms.

The sale of large amounts of gold on the paper market, the COMEX, has served to cap gold’s progress, amid allegations of manipulation. These sales may or may not continue but if they do then they will have a negative impact on gold, at least until the physical market becomes the dominant force.

Chart of Gold’s progress in 2014


The technical analysis of any commodity is indeed a complex process, but today we will take just a quick look at the wedge formation that gold has formed. We can see that there is almost the same number of higher lows as there is lower highs which renders the chart fairly neutral. However, if the upper line or the lower trend line is broken then gold could move quickly in that direction. As gold is at the thin end of the wedge then a breakout will be upon us in a matter of weeks.

Conclusion

For disclosure purposes I am a gold bull, but not a perma-gold bull and as such have difficulty wearing a bearish hat. However, if gold breaks to the downside then we could see a test of the previous lows of around $1180/oz. If it breaks to the upside in a seasonally good time for precious metals then the stage would be set for an end of year rally of some substance. However, new record highs this year are just too big an 'ask' so go gently if you intend to buy gold, silver or the associated stocks in the near future.

Our preference is to hold physical gold and silver in our very own hands; invest in a small number of good quality precious metals mining companies and occasionally trade options. We are of the opinion that an investment in physical metal means just that and not a proxy by way of paper being held by someone else on our behalf.

We believe there are times to be fully invested and times to exercise a little caution. At the moment we are not prepared to adopt a cavalier approach to investment in gold or their associated producers as we have been through a number of rallies that have failed over the last few years, so we need a tad more certainty before we can fully commit our funds. We are content to have the lion’s share of our funds in cash and wait for the right opportunity to present itself. Our short list of mining companies consists of around thirty companies of which we have about ten or so favorites.

‘Go gently’ is the order of the day.

Got a comment, fire it in, especially if you disagree, the more opinions that we have, the more we share, the more enlightened we become and hopefully the more profitable our trades will be.

The miners have started 2014 very well indeed on the back of rising gold prices, so the question is; is this the real deal or another head fake? Is the bottom really in? Could there be a final capitulation just ahead of us? Will the summer doldrums take the PMs lower?

If you would like to know which stocks we are buying and selling please join us atStock Trader our premium investment service.

 

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Reader Comments (3)

Gold at $1,265.00 has broken the downward trend (in the enclosed chart).

In the short term, it doesn't look good.

But then, a lot of things don't look good in the short term. That is why I will not take my eyes off the long term.

Hal

September 2, 2014 | Unregistered CommenterHal

buy at 1240

September 2, 2014 | Unregistered CommenterLars

There seems to be an extreme amount of double talk in the metals market these days, I guess because few if any understand why the metals market is behaving oddly and not reacting to events as expected.

I cannot see how the stock market can continue to be inflated as it is and it has to be near a major correction as in 2008, but worse this time. I got out of the stock market too early however, over a year ago believing that market turnover was imminent. But low and behold the Fed Wizards were able to continue the blowing of hot air into the market another year or more. I am disgusted.

Are we once again underestimating the Fed Wizards and their ability to continue pumping things up?

I have been very patient putting up with this market chicanery to reap by just reward from my belief in real money (that is, gold).

This may be similar to a young adolescent waiting patiently for his steady girlfriend of years to finally give him what he wants.

September 2, 2014 | Unregistered CommenterPeter

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