Where to Now for Gold?

By: Julian D. W. Phillips | Fri, May 15, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.

When to buy and sell?

It is always so easy to ask someone, "Can I buy at the bottom and sell at the top?" But life doesn't let too many of us do that and when it does it has a nasty habit of letting us do it once or maybe twice then lets us get it wrong after that. Many believe that once you have the technical picture giving the top and the bottom that will do the trick, but alas, many technical analysts will come up with different prices for tops and bottoms.

So how does a professional approach the question? He looks form all sides but particularly the fundamentals, which dominates the future prices. Then he uses the Technical picture to refine the entry and exit points thereafter, which is what Peter does on the Technical pictures below [in the newsletter Gold Forecaster ]. Resistance and support levels guide us on when to buy or sell, but it is always unwise to believe that a particular point will be absolutely right. The price will get very close to a particular point but almost invariably, it either over or undershoots it. A professional will be happy is on a long-term investment he gets within 5% of the bottom price and the top price. He is following the tide and current of the market for the long haul, with big money.

Traders and day-traders, in particular, chase the waves only and so ignore all but the daily picture. 52% of the best trader's trades make money. Their payment really comes in the sandpapering of their nerves. Professionals are often 'burned out' by the time they are 40 – 45 years old.

So let's look at a tried and tested way of making the entry point, then the policy between then and the exit point. Right now a look at gold shows that after two attempts to surmount and hold the $1,000 level the gold price has pulled back to $870 and is trying to hold its position above $930 now. At the moment it just does not want to go below $880. And next?

How to read the gold price right now.

The first question a professional investor must ask himself is: "What are the prospects of the gold price falling from here?" A look at the action [see chart below] in the last year shows that it has held support over $850 - $870. Some hope it will still pull below $850 to the lower $800, but we feel that support at between $850 and $870 has shown enough strength to support a downward attack. That is the Technical picture too, one of strong support.

We now turn to the fundamentals to see what evidence there is to show what is there to point the way forward. It turns out that the reason for the failure to reach $1,000 and hold it is that the market needed time to get used to the concept of $1,000 gold. Long-term investors were happy to take positions all the way up to that price level and much of the way down. Right now they are watching the macro-economic scene to see if other investors and the fundamentals agree with them. After all, if they find that they are alone in this view and other facets of the gold market disagree with them, then they will have to sell on a falling gold price, a very unpleasant experience. But they're not selling their holdings but are waiting for the market to join them and for a trigger to take them higher in their buying.

Indian Market

Another key factor is the Indian market, a market that won't buy if they believe that the price will fall back after they have bought. They like to know that a 'floor price' is established and then they want to buy on that. Well the jump from under Rs.10,000 for 10 grams of gold to Rs.15,000 was just too much for that market to swallow and produced high levels of sales of 'scrap' gold making India self-sufficient in gold until now. These are soon to dry up, we believe, as the gold price holds and the prospect of even higher prices comes on the horizon. We believe that Indian imports will continue fairly slowly 'on-the-dips' before the season starts at the end of August, then will come in heavily provided the prices are still below $1,000 to $1,100.

We also believe that jewelry demand will recover to some extent for the same reasons the Indian market will.

Central Bank buying growing?

Central Bank selling is swinging over to the buy side with half the amount sold being bought by other central banks, either direct from their own miners or dipping into the market to do so. Their selling is slowing and the buying is growing and may well strongly overtake any selling remaining!

As the global economy starts to splutter into life we also expect industrial demand to pick up.

So all in all demand looks set to recover.

On the other side of the equation, supplies don't look good at all. Miners, facing problems in the mines, with costs and labor, are set to produce a shrinking amount of gold each year for the foreseeable future. As scrap dies away again, so a big source of supply in the last six months will fade away leaving stockists of gold, with very low inventories. Central Bank supply is losing its significance too. Combine these factors and you can see that it does not take a large increase in demand to swing the supply / demand formula over to a heavy bias on the demand side. Only much higher prices will chase demand away as it did last year.

Should investment demand return with even a mild force the gold price just has to run upwards to new record levels.

Is now the right time to buy?
For Subscribers only

Holding the position
Once we are in the market and looking up, what do we feel? Are we emotional? We shouldn't be, because our decisions should be well-founded. Now our decision is not simply the price at which we exit and wait for it. No, much more is required. We keep our eye on the fundamentals and Technical pictures to watch for signs of changes and constantly evaluate them in terms of the gold price and their effect on it. After all, the factors driving the price can change for the better, or for the worse, re-defining our target exit point.

With gold, life is much more complicated than with any other metal [silver being its pale shadow] so the scope of monitoring covers international relations, currency markets, interest rates, global economic factors with oil as a sort of bell-weather.

Coming into the picture are the investor's objectives. Is he there for the long haul, or is he a trader. If for the long haul, is he 'on margin' and so more vulnerable to volatility? Or is his position institutional [fully paid up and able to hold for several years if the position is justified]? This shapes his capability and restricts or widens his investment capacity and his investment.

Irrespective of our investment shape and risk tolerance the gold price will march on regardless, so we are its slave not its master. We must have the wisdom to see where it is going over certain periods of time.

So, you have to ask yourself, are you waiting for $1,000, or $2,000 or for gold to be taken over by government or what? Are you holding for your employees for when they are pensioned off? Or are you holding until global uncertainty clears and confidence in the system is in sight? Each of these requires a different level of attention to the investment.

Gold Shares or Gold itself?
For Subscribers only

Long-term trading?

The gold price itself never goes straight up but can swing as much as 30%, giving even long-term holders the opportunity to move out, then back in. The fall from $1,000 to just below $900 [forget the top and the bottom for reasons given above] was in reality only 10% so this only just warranted a move out, to move in later. If we had sufficient fundamental reasons for moving in and out yes, such a trade could be wise, but it is so easy to be wrong-footed with such a move. Holding the position often proves more profitable because of this danger as traders well know.

Selling the investment.

Each investor with his own investment parameters, his own risk profile and his investment objective must make his exit point decision alone, because he is the only one who knows his situation the best. Professionals can only re-assess the market fundamentals, combine these with the Technical picture and point to the places where the gold price signals a trend change. Based on this, he will signal an exit.

When?
For Subscribers only

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com.

 


 

Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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