Gold - What to Watch out for in Early May
Based on the April 22nd, 2011 Premium Update. Visit our archives for more gold & silver analysis.
We have written before that institutional investors are going to wake up one day and realize that they need to buy gold for their portfolios. Well, that's beginning to happen.
This week the Texas teachers' pension fund, one of the largest college endowments, announced that it has placed 5% of its assets in gold bullion, nearly $1 billion's worth, in excess of 650,000 ounces at today's prices. It is interesting to note that the fund chose to take physical possession of the bullion rather than buy it through a gold ETF. There they sit, all 6,643 gold bars, in an undisclosed location underground in New York City. The chief investment officer for the fund told CNBC that they began acquiring gold in September of '09 at about $950 dollars an ounce and that their average price is about $1,150. He said that rather than continuously rolling futures contracts, it became easier and more economical to take possession of the bullion.
The standard asset allocation recommendations routinely call for a 5-10% allocation to gold (which we find too low). Yet, despite gold's rise it still represents less than 1% of the global market cap of all assets. Without a doubt, investors will be watching closely to see if this move triggers similar reallocations among other large pension funds. Some big time heavyweight investors are already deep into gold territory, as we have reported before. Some of the big-name investors who were smart enough to profit by betting against mortgage-backed securities have invested their profits in gold. In the fourth-quarter of 2010, legendary investor George Soros added 24,800 shares of the GLD making him the seventh largest holder behind John Paulson who owns 31.5 million shares. Large investment banks are also loading up on gold.
Gold and especially silver certainly shone this week - the latter even moved relative close to its 1980 high! Consequently, it will be particularly interesting to see what they do next. Since we live in a globalized world, it is often the case that markets influence each other. In this essay we're going to focus on currencies and how two of them can affect the precious metals market. We will start with the long-term chart (charts courtesy by http://stockcharts.com.)
In the long-term USD Index chart this week, we see a continuation of the decline which began in early January. Index levels are now close to the level of the 2009 lows, and this support line is currently being tested.
A slight move below the support line has been seen, but the breakdown is not yet in. RSI levels are currently close to 30 and indicate that perhaps the local bottom will be seen very soon. This has been the case many times in the past when RSI levels were so low.
Looking at the short-term USD Index chart, we see that index levels are still within the declining trend channel. The lower border was recently touched and the index moved back up slightly. It does not appear that a rally is imminent as the next cyclical turning point appears to be likely in early May. Until that time, more weakness or sideways movement is more probable as opposed to seeing any serious rally begin right away.
At this time, it's too early to comment on the likely strength of the next rally in the USD Index. However, given the decline which has been in place since January with no significant contra-trend moves, it is possible that the rally could be significant. This of course, would be quite negative for the precious metals sector in general.
In the very long-term Euro Index chart this week, we can see that index levels have broken through the declining, long-term resistance line. This is a very positive factor and, taking this chart alone, we would expect the rally to continue.
Of course, the situation for the dollar will likely impact what happens with the euro to a great extent. A turnaround is expected in the USD Index but is not likely to be seen immediately. So the rally here in the Euro Index could continue and possibly turnaround in a few days or even a week from now. Of course, this is somewhat a speculation on our part but the charts are suggesting this possibility. In addition, RSI levels are about to flash an overbought signal as they are very close to the 70-level.
What does all of this have to do with gold? Quite a lot, as gold has been recently moving in tune with euro. Please take a look below for details.
In the short-term Euro Index chart, we see that the breakout has been verified and index levels have moved above the level of the November 2010 high. Since mid-February, tops in the Euro Index have corresponded to local tops for gold.
An early May turnaround could be seen here as well, as the cyclical turning points mentioned when analyzing the USD Index, are present also here. It seems that the next turnaround (likely a top) will be seen at the beginning of May. Such a development could have an important impact on the precious metals sector. As far as price targets are concerned, we will leave details to our Subscribers - in short, it might be a good idea to closely monitor the situation on the silver market.
Summing up, the decline in the dollar has continued but is likely to turn around within the next week or two. The rising Euro Index is also likely to see a downturn at that time. Taken together, these currency market events will probably have a negative impact on gold, silver and gold and silver mining stocks, but not necessarily right away.
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Thank you for reading. Have a great and profitable week!