Gold Blog Archives - Gold Investment Advice

Gold – Is it too late to buy Gold Stocks?

admin — Sat, 18 Apr 2015 21:22:04 +0000

As any good contrarian investor will tell you, once something is being talked about in the mainstream press, and being tipped by your taxi driver, it’s time to sell. In some instances, the magazine cover is the most recognised way to tell if a concept, idea or person has gone mainstream. Remember the famous Business Week 1979 cover, “The Death of Equities”? That is a textbook case of the media getting it wrong. The Dow Jones Industrial Average was at 800 back then. This week, even after all the recent turmoil, it closed at over 11,500.

The recent rise in the price of gold has many wondering if we have reached the stage where, as an investment theme, it has gone mainstream. Since July 1999, the average price of gold has risen from $255.81 to the recent highs of $1,900. When any commodity price rises so much, let alone the dramatic increase in the stocks represented in that industry, it warrants some cause for concern. As a contrarian indicator, we could look at the many magazine covers out there to make our determination of whether gold has gone mainstream. However, using such an indicator can take a lot of cover stories and a substantial amount of time before we eventually could consider ourselves correct. The number of missed opportunities and inaccurate calls for a market top would be many.

However, with the advent of keyword searches and proprietary databases, we can look at the historical significance of all mentions of gold.

In the chart below we see, on a 10-year basis, the number of times that gold is mentioned in Barron’s from May 1921 until August 2011. For reasons that shall be explained, the decades of the 1930s and 1980s were periods when the number of gold mentions peaked.

You can see that the peak in the number of mentions on the topic of gold occurred after major turning points in the price of gold. The bar chart below shows the decade of the 1930s in greater detail. The year of 1932 shows the most articles written on gold. The decline in interest after 1932 reflects the herd mentality of diminished expectations for gold after England’s September 21, 1931, departure from the gold standard.

The impact of England’s suspension of the gold standard led to a domino effect of countries abandoning the gold standard. Denmark, Norway, and Sweden abandoned the standard by the end of the same month. In October 1931, Finland was next to go off the gold standard. Those that remained on the gold standard in Europe suffered huge losses due to the devaluation of their large holdings of British pounds in their treasury. The belief at the time was that the currency would always be backed by the set price of gold.

However, after many countries departed from the gold standard, the price of gold stocks began to bottom. With fewer articles on the topic of gold after 1932, the bull market in precious metal stocks was just beginning as demonstrated in the chart below of gold and silver stocks from 1924 to 1933.

During the financial crisis from 1929 to 1932, it seems as if gold was popular in Barron’s until it was no longer being propped by governments through the use of a gold standard. Once freely able to find a price, the process of gold stocks bottoming was inevitable.

After the peak in the price of gold in 1979/1980, Barron’s was again late in the most mentions of gold. However, the period that followed the 1980’s peak in mentions of gold held at very high levels as the die-hard gold bugs were unwilling to accept the reality of the disinflationary environment that the world economy was entering.

In the chart below, we observed that a significant drop-off in mentions of gold after 1987 may have to do with the fact that gold stocks declined equally as much as the Dow in the same period of time. Since the decline in gold stocks couldn’t offset the losses of stocks as anticipated, anyone who would have claimed that gold stocks were a refuge during a declining market had all the evidence to demonstrate that such a notion was foolhardy.

In light of the fact that I still believe that we’re in a secular bull market in gold stocks, my expectation is that the number of mentions in gold need to match the levels of 1980 or 1932 before we’d be concerned that the lagging contrarian indicator of Barron’s mentions of gold has any relevance on future long-term price declines in the metal and gold stocks.

Gold stocks are as cheap as they have been in a decade. The chart shows the price-to-EBITDA ratio of the XAU Index of stocks, both in absolute terms and in comparison to the price-to-EBITDA ratio of the S&P 500 Index. This ratio is a measure of price-to-cash-flow and tends to illustrate valuation more accurately than the more familiar price-to-earnings (PE) ratio.

In absolute terms the price-to-EBITDA of the XAU Index is currently around 7.5 times, which is only about 10% higher than the price-to- EBITDA of the S&P 500 Index. Both of these metrics are as low as they have been in a decade.

To see my current list of preferred gold stocks to buy, in the UK and the US see Gold stocks to own.

Comments

Which gold stocks do you own? Will stocks continue to be a good investment? Leave your comments below.

Originally published by Gold Investment Advice

Currency and Forex Live Charts

admin — Sat, 31 Mar 2012 19:35:39 +0000

Currency and Forex Live Charts

GBP USD Live chart – GB Pounds Sterling vs US Dollar
EUR USD Live chart – Euro vs US Dollar
AUD USD Live chart – Australian Dollar vs US Dollar
GBP JPY Live chart – GB Pound sterling vs Japanese Yen
USD CAD Live chart – US Dollar vs Canadian Dollar
USD JPY Live chart – US Dollar vs Japanese Yen
USD CHF Live chart – US Dollar vs Swiss Franc
EUR JPY Live chart – Euro vs Japanese Yen
CHF JPY Live chart – Swiss Franc vs Japanese Yen
AUD NZD Live chart – Australian Dollar vs New Zealand Dollar
XAU USD Live chart – Gold vs US Dollar
XAG USD Live chart – Silver vs US Dollar

Fast Live Charts

Like many traders I rely heavily on a set of fast, accurate Currency and Forex live charts.

Goldstart already has a wide range of charts available but they were not quite good enough. I wanted a set that loads super quick, and that works just as well on a mobile device as on a PC browser.

To make the new set of Currency and Forex Live Charts I have started again. I rebuilt the style sheets from scratch, pulled out all the slow loading menus, and have put the code through Pingdom, Yahoo Speed and YSlow.

The result? A set of live forex charts on Steroids… Please leave a comment below to let me know what you think. Bookmark these charts.

Originally published by Gold Investment Advice

Gold shares – List of UK and US gold stocks to buy

admin — Sun, 18 Sep 2011 19:51:29 +0000

Gold stocks are as cheap as they have been in over a decade. Hard to believe given the rocketing gold price, but shares have been left behind. As any investor knows, buying stocks in any company is a leveraged play on the profitability of its prime business. In the case of gold we have been in a decade of sharply rising prices. For the miners, the cost of production is generally covered at between $800 and $1000 per ounce. As the price rises above that, and it is currently sitting very much higher than that point, the remainder is pure profit.

If you believe, as I do, that governments around the world will continue to interfere in markets and try to bail out their near-bankrupt countries, then gold stocks are going to the moon. If you don’t have a few of these in your pockets, then jump in now. As a point of disclosure I should note that I do own several of the stocks below, though at the point of writing only the majors.

The following are my top choices from the XAU index. Note that these are all US listed. UK Gold shares follow.

Freeport-McMoran (FCX)- Freeport-McMoRan is within 10% of the 52-week low and has a dividend payout ratio of 17%. The P/E ratio is at a modest level of 7 times earnings. Value Line indicates that FCX is selling at least 35% below historical fair value. Since 2004, FCX has traded up to its estimated fair value and then retrenched. Investors in FCX should expect to sell at the $62 level and rotate into other relatively underpriced gold stocks at that time.
AngloGold Ashanti (AU)- At the end of last year (2010) AngloGold’s total reserves amounted to 71.2 million ounces. The stock is within 15% of the 52-week low and has a dividend payout ratio of 13%. The trailing P/E is 22 but it is expected to grow earning next year, which brings the forward P/E to 9.5. According to Value Line, AU is trading only 6% below its historical fair value. Using the 5-year historical book value of 4 as a benchmark, the current book value of 3.8 suggests a 5% discount to the average.
Kinross Gold (KGC)- Kinross operates in the Americas, Africa, and Russia. At the end of 2010, its proven reserves were 62.4 million ounces of gold, 90.9 million ounces of silver, and 1.4 billion pounds of copper. The stock is currently trading just 1.3x its book value. If the 5-year history is any measure, the stock should rise 77% and trade at 2.3x book value. The company continued to increase its dividend over the years. Started in 2008, Kinross paid $0.08 per share and now it pays $0.10. The current payout ratio of 10% along with current gold price implies that dividend increases may be around the corner.
Gold Fields (GFI)- Gold Fields engages in acquisition, exploration, development, and production of gold. At the end of 2010, gold equivalent reserves stood at 78 million ounces. The company’s P/E of 40 is high and price-to-book ratio is fair. While the current dividend yield of 1.7% appears to be high for a gold stock, that dividend is heavily dependent upon the profitability of the business. GFI’s dividend policy is to pay out 50% of its cash earnings depending upon investment opportunities.
Barrick Gold (ABX)- According to Value Line investment survey, Barrick Gold is fairly valued at 10 times cashflow. With an estimated 2011 cash flow of $6.10 per share, Barrick Gold (ABX) is selling 13.72% below fair value as of September 13, 2011. Despite having a low dividend yield, Barrick has a sustainable dividend payout ratio of 12%, allowing for a substantial decline in earnings if necessary.

And for UK listed shares I recommend buying a selection of the below:

Rangold Resources – Randgold Resources is an African focused gold mining and exploration company with listings on the London Stock Exchange and Nasdaq. Major discoveries to date include the 7.5 million ounce Morila deposit in southern Mali, the 7 million ounce Yalea deposit and the 5 million ounce Gounkoto deposit, both in western Mali, the 4 million ounce Tongon deposit in the Côte d’Ivoire and the 3 million ounce Massawa deposit in eastern Senegal.
African Barick Gold – ABG is Tanzania’s largest gold producer and one of the five largest gold producers in Africa. Mineral reserves have been calculated using an assumed long-term average gold price of US$1,000.00 per ounce, a silver price of US$16.00 per ounce and a copper price of US$2.00 per pound, leaving ample room for fat profits.
Oxus Gold – A much smaller AIM listed Gold stock, with the offers of huge returns, but consequently much higher risk. Oxus is the only publicly listed gold mining company with its main operations inside the Republic of Uzbekistan.
Goldstone Resources Ltd – GoldStone is an AIM listed exploration company based in South Africa with exploration skills that focus on gold in West and Central Africa.
African Consolidated Resources Plc – ACR began with a focus on gold in Zimbabwe. The strategy rapidly evolved to a multi-mineral approach and now encompasses the acquisition and development of a diversified portfolio of mineral holdings in Zimbabwe with prospects in Zambia and Mozambique. Such acquisitions and exploration when measured against global comparatives are expected to be extremely cost-competitive.
African Eagle Resources Plc – African Eagle is developing the major Dutwa nickel project in Tanzania. The Company discovered Dutwa in 2008 and is now conducting a feasibility study. The Company is evaluating a second promising nickel deposit at Zanzui, 50km south of Dutwa. African Eagle also holds significant interests in several “legacy” mineral ventures, acquired before it discovered Dutwa. These include copper in Zambia, gold in Tanzania and uranium.
Ariana Resources Plc – Ariana Resources plc is an AIM-listed and PLUS-traded gold exploration and development company. Ariana’s advanced projects are located in western Turkey. Production is currently scheduled to start in 2012 on the Red Rabbit Gold Project.
Cambridge Mineral Resources Plc – Cambridge Minerals operates Gold mines in a number of countries including Colombia, Bulgaria, Serbia, Spain and Peru. This is definitely one of my higher risk preferred choices. I like the diversity of the countries and the aggressive nature, which will return you a hugely leveraged multiple on gold if the price stays high or climbs.
Cluff Gold Plc– Cluff Gold is a gold developer-producer with assets in West Africa. The Company generates cash flow from its producing asset, Kalsaka in Burkina Faso, which produces 70,000 ounces of gold per annum. The Company strives to become a mid-tier producer through the development of its wholly-owned Baomahun project in Sierra Leone, which is expected to contribute an additional 157,000 ounces of gold per annum, with significant exploration potential along strike.
Condor Resources – Condor Resources Plc is a UK based AIM listed exploration Company with a strong focus on the exploration and development of gold and silver resources within Central America. The Company owns outright a portfolio of high quality concessions prospective for high-grade epithermal gold and silver in Nicaragua and El Salvador in Central America.
Eurasia Mining Plc -Eurasia Mining Plc is an international mineral exploration company, listed on the Alternative Investment Market, currently operating in Russia. Eurasia’s stated objective is to explore for the platinum group of metals and gold through self-funded own exploration targets and joint venture partnerships with strategic operators and local partners. Operations are funded from the company’s own equity funds and funded joint venture agreements.
Mercator Gold Plc – Mercator is now called ECR. ECR Minerals plc is a mineral development company with interests in Argentina, the USA, Indonesia, Thailand and Australia. Our projects and interests encompass a range of commodities with a particular focus on gold and base metals. ECR shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange with the symbol ECR and are also traded on PLUS Markets. ECR’s American Depositary Receipts (ADRs) are traded in the USA on an over the counter (OTC) basis with the symbol MTDGY
Shanta Gold – Shanta Gold Limited is an exciting gold exploration and development company, engaged in greenfields to advanced exploration in highly prospective under-explored areas in Tanzania. Shanta boasts a strong board and an experienced mining and exploration management team, combined with influential Tanzanian shareholders and partners

Gold may well correct further, but with the problems in the Euro and sovereign debt far from easing, I would expect these stocks to go much much higher over the next 5 years.

Comments

Which gold stocks do you own? Will stocks continue to be a good investment? Leave your comments below.

Originally published by Gold Investment Advice

Gold ETFs

admin — Sun, 18 Sep 2011 17:42:30 +0000

Investing in gold ETFs can be a nightmare to think about. There are many options on the market and ETFs are a relatively new entry to the markets as well. With the cost of gold rising so dramatically and with projected costs skyrocketing upwards even still (assuming the current economic projections are correct), now is the time to get started in gold. However, many people are put off by the extraordinarily high price of gold. For the average person looking to invest in gold without the prohibitively high entry cost, we’d strongly recommend looking into one of the many gold ETFs that are presently on the market.

Firstly, it’s important to understand the premise of an ETF. An ETF is much like a mutual or hedge fund. Essentially it is a pool of assets that has some underlying net worth. The initial net worth is then divided up into equal shares and sold on the market. Every day, these shares exchange hands and at the end of the day the total net worth of the fund is re-calculated. So, as a simple example, suppose there’s a fund with $1 million invested in gold, silver, and some stocks. This fund is split up into 1 million shares and has an IPO for $1 each. The stock trades on the first day and gold has a strong price surge. The stock ends off at $1.10, but the fund’s total worth is $1.2 million. Therefore each stock technically has a correct worth of $1.20. Clearly the closing price is undervalued, so the stock will likely open at a higher price the following morning.

The benefit of ETFs is that they allow you to diversify without worrying about the hassles of mutual funds. Mutual funds are slow and cumbersome to buy and sell. However, gold ETFs are quick and can even be traded in the same day. Everyone with a brokerage account can also trade ETFs as they are bought and sold the same way as stocks. There are two primary ETFs that you can look at purchasing. One, iShares Gold Trust, is an ETF that seeks to roughly track the price movements of gold. UK investors can take a look at a gold unit trust fund called Merrill Lynch Gold and General Fund. This fund also seeks to roughly correspond with the price movement of gold.

One might be wondering what is the advantage of choosing a gold ETF over physical gold or gold stocks. Generally it has to do with the quantity of the investment. Physical gold, if purchased in small quantities can be very challenging to sell and buy. There can be very high fees associated with its acquisition or disposal, and furthermore storage of your gold can be very hard (having 20 1-oz bars lying around the house would be giving would-be thieves a very easy way to steal about 20,000 GBP). Buying gold ETFs however is lightening fast and very easy to do. Similarly gold stocks are not the same as buying actual gold. You are buying a company that is related to gold, so the welfare of that corporation is not necessarily dependent upon the price of gold (although much like oil, these two are highly correlated).

Buying gold ETFs certainly has its advantages over other forms of gold. If you’re looking to invest in this precious metal, take the time to review a few different ETFs and carefully plan your purchase. Gold is absolutely necessary for any portfolio, however how you include it in your investment lineup can make all the difference in the world.

Originally published by Gold Investment Advice

Gold versus Silver

admin — Wed, 15 Jun 2011 21:03:37 +0000

Where to invest your money can sometimes be a very complex decision. People often throw out the names of certain stocks or give you tips on what will be the hot new industry to take the market by storm. However, while investing in stocks has its advantages, investing in precious metals has historically been one of the safest investments. The two big metals to invest in are generally gold and silver, but when debating gold versus silver as an investment, it becomes harder to discern which is the wiser one to invest in.

Each metal has its own unique advantages and disadvantages. Gold is very expensive, while silver is significantly cheaper. As of the time of this writing, the price of one ounce of gold was around $1,500 USD (910 GBP) while silver was around $38 USD (23 GBP). This makes silver a significantly less expensive investment and one that you can readily get into. Buying gold coins can be a fortune for example, with coins costing well into the hundreds of dollars many times. But you can get a significant quantity of silver coins for a similar investment.

Because of the high cost of gold, it can tend to be somewhat more volatile. Silver tends to always be relatively low cost to own, but gold is expensive. As such, its price is often linked to the relative wealth of the population and the expectation of the currency’s future worth. For example, due to fears of hyperinflation in the United States, gold prices have skyrocketed worldwide. However, conversely, if there were to ever be a strong economic crash, gold prices would plummet equally hard due to the lack of funds to buy gold coins and so on. As silver is a smaller cost, the coins would retain more of their value due to their relatively lower cost and the fact that silver is a more “useful” metal. One could easily melt silver and make a spoon for example, but gold in its pure form is too malleable to be made into anything solid.

To this extent, silver has many, many industrial uses whereas gold is typically limited more to jewelry. Silver is used in electronics, water purification, batteries, cutlery, and so on. The number of potential commercial uses for silver is very high and this would allow it to better retain its value during a crash. That’s certainly not to say that gold is worthless – if it was, then the United States wouldn’t have invested so heavily in gold reserves. Rather, silver has a lot of tangible, practical benefits that may make it much easier to sell if there was ever to be a significant economic meltdown. This is something to consider when building your investment portfolio.

All in all, in the gold versus silver debate, there isn’t necessarily a clear winner. Gold has long been the investment of choice for virtually everyone in the market, but that doesn’t necessarily make it the best choice either. Silver has its advantages as well and sometimes, even though gold is generally preferred, one has to stop and wonder if that’s necessarily logical. The best advice is probably borrowed from the adage “don’t put all your eggs in one basket”. Diversify your portfolio and include both. Don’t just invest in gold or silver but ensure that you have money in both.

Originally published by Gold Investment Advice

Gold Mining Shares – Top UK Gold Companies

admin — Tue, 07 Jun 2011 19:10:27 +0000

Gold has long been regarded as a safe haven for investors. Although stocks may fluctuate rapidly during market booms and busts, gold is usually relatively stable and can protect against evils that other investment tools cannot (such as hyperinflation – if this were to ever happen, gold would inflate on an equal scale, whereas stocks and other investments may not). However, due to this fact, gold also tends to be a relatively flat investment and may not provide the returns that other investments, such as stocks, can provide. As such, if you want some of the security that gold provides with the return potential of the stock market, you may wish to invest in UK gold mining shares.

UK gold mining shares are traded publicly and are generally a part of the FTSE or may even be traded on the AIM. Generally speaking there are two popular shares that are highly recommended for beginning investors. African Barrick Gold (LSE: ABG) is probably the safest investment for those looking to reap the benefits of gold. With a net income of 136 million GBP in 2010, this is a very secure stock to be in. They are the largest miner of gold in Tanzania, and their IPO was just done very recently (originally they were a part of Barrick Gold – one of the largest miners in the world). While Barrick Gold is perhaps the more safe investment with its long rich history of returns, being a new company with a very solid mining capacity, ABG is probably the better buy in the long run for risk versus reward. There is very little downside, but amongst UK gold mining shares, it has a very strong potential.

The second mining share that is highly recommended for beginning investors is Highland Gold Mining (LSE: HGM). Backed by Russian billionaire Roman Abramovich, Highland Gold is poised to be one of the world’s leading gold stocks in the coming years. It suffered some losses in 2008, but has turned quite profitable and is seeking to expand its operations in the coming years. Its primary focus will be Russia whose gold deposits are second only to that of South Africa, and so far have been relatively untapped. With the potential for the Russian government to permit mining in new locations, HGM is in prime position to expand its operations and become a very profitable stock for investors. As such, it is probably the next best stock for beginning investors to own as its reward to risk ratio is quite high.

There are many UK gold mining shares, but the above two are the ones that every investor should have. This is especially beginning ones looking for something stable but also wanting to realize a moderate return. Regardless, gold mining is probably one of the best stock segments to be in as it is reasonably safe, but has a very bright outlook. As such, strongly consider adding one of these UK gold mining shares to your portfolio. Chances are you’ll be very happy you did later on.

Originally published by Gold Investment Advice

Master Investor Show 2011 – Tips from Evil Knievil and Lucien Miers

admin — Sun, 17 Apr 2011 16:28:37 +0000

I attended yesterday’s Master Investment Show 2011 at the Islington Design Centre at Angel in North London.

Although I couldn’t stay thewhole day I was lucky enough to see Nigel Wray, Evil Knievil and Lucien Miers, which is always fascinating. Below is a short summary of their tips, both Long and Short. Lets see how they do this year.

Evil Knievils Long tips:

Prosperity Minerals (PMHL.L) – Currently at 128p
China Wonder (CWO.L) – Currently at 22p Apparently has 32p/share cash in the bank
Renovo (RNVO) – Currently 16p Has 24p cash in bank and likely to be wound up soon as their licence in China has been revoked
AIB 2019 12..5% Bond

Evil Knievils Short tips:

Asos – Currently at 2050p. BTW He tipped this as a great buy back in 2002 (I was there) at 22p! Its gone up by 10 000% since then
Parkmead (PMG) – Currently at 20p. Run by a crook, Tom Cross, ex Dana Petroleum.

Lucian Miers’s Long tip:

Exillon (EXI)

Lucien Miers’s Short tips:

Parkmead (Aim listed)
Purecircle (Aim listed), a Sweetener-making company that will go bust in his opinion.

Originally published by Gold Investment Advice

Top Ten Investment Books

admin — Fri, 11 Mar 2011 19:28:33 +0000

Over the years I have read a pretty wide selection of investment books, from
understanding the basics like How to read an annual report, to contrarian investments strategies
by David Dreman. While many of these books regurgitate the same messages
about compounding or following the trend, there are a few that I found
genuinely enlightening. Sometimes when you finish a book you can’t
help thinking about what it said for days or weeks afterwards. These all fit that category.

Whether you place your faith in the triple tops, head and shoulders formations
and Vix sentiment readings of the chartists or prefer to stick to Warren Buffet’s strategy of fundamental
analysis these books cut through the usual rhetoric and are an enlightening read.

The biggest lesson I have learned is never to think you truly understand
the markets. Be humble to be rich. However with a few simple tactics
you can really stack the odds in your favour.

Here is my personal top ten, in no particular order. Click links for a review.

Top Ten Books for Clever Investing

1.Contrarian Investment Strategies: The Next Generation

Review Buy it on Amazon

2. Encyclopaedia of Chart Patterns

Review Buy it on Amazon

3. Secrets for Investing in Bull and Bear Markets

Review Buy it on Amazon

4.How the Stock Market Really Works: The Guerrilla Investor’s Secret Handbook (Investor’s Guides)

Review Buy it on Amazon

5. Warren Buffett Speaks: Wit and Wisdom from the World’s Greatest Investor

Review Buy it on Amazon

6. Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market

Review Buy it on Amazon

7. The Armchair Millionaire

Review Buy it on Amazon

8. Keys To Reading An Annual Report

Review Buy it on Amazon

9. Against The Gods

Review Buy it on Amazon

10. The Seven Habits of Highly Effective People

Review Buy it on Amazon

Originally published by Gold Investment Advice

How low will gold go?

admin — Wed, 12 Jan 2011 13:21:56 +0000

By Dominic Frisby:

Gold and Silver have both entered a correction phase.

Gold began 2011 at around $1,420 an ounce. By the end of last week, it was more than 3% lower at $1,370. Silver, meanwhile, toasted the New Year at around $31 an ounce. Celebrations were due – it had risen some 80% in 2010 – but the hangover quickly set in. A week later it was down more than 5% at around $28.60.

Meanwhile, at $34, Silver Wheaton – one of the leading silver stocks – is now down over 20% from its early December high of $42. That’s quite a wallop.

But gold and silver have had a stellar 12 months. This correction is overdue. And it’s one that I welcome. Nothing goes up in a straight line and all that. Ultimately, it will add to the longevity of this bull market.

How low will gold go?

The fundamental argument for gold has not changed. The world over, we still have inflation, deflation, negative real rates of interest, unpayable debts at most levels of society, unsustainable deficits, out-of-control government spending, misguided monetary policy leading to mal-investment, excessive speculation and bubbles – I could go on.

There are many drivers to this bull market in gold, and none have gone away. Nevertheless, corrections are inevitable. We have one now. The question is: ‘How low will it go?’

I’d like to try and answer that as I feel I’ve made a bit of a discovery: the 144-day moving average. It doesn’t sound that exciting, but it’s amazing how well it has been working over the last two years.

There are 252 trading days in a year. Prior to the crash of 2008, once or twice a year, gold would return to its 252-day moving average (the average price of gold over the previous 252 days). It would flirt with it for a while, before making its next move up.

Here is a chart of gold from 2001 to 2008, which demonstrates this:

However, since rebounding off the crash of 2008, it has not gone back to this line once. Rather, the 144-day moving average (blue line on the chart below) has been the line to which gold has returned. It seems to go there two or three times a year.

That 144-day moving average currently lies at around $1,300 an ounce and rising. I suspect we will get to it on this correction. If we follow the time scale of previous corrections, then we should reach the low towards the end of January. (Buy gold on a limit order now)

If gold bursts down through that line with volume, then we are in for something a bit more serious than a normal, ongoing bull-market correction. But I am fairly confident it will hold, barring some sort of global liquidity panic.

For those of you who want to follow gold against this moving average, here is a chart that will track progress.

If gold does get to this line, one low-risk trade might be to buy gold at the moving average with a stop just below. (Buy physical gold on a limit order now)

I should say that when gold corrects, you usually see one wave of selling. This is followed by a bounce, which is then followed by a second wave of selling, at the bottom of which you see the low.

We have had the first wave of selling and, as I write this, we now seem to be enjoying the bounce. So it’s likely that that second wave of selling is just around the corner.

The three phases of bull markets

It is said that a major bull market has three phases. The first phase is the stealth phase, where only the ‘smart money’ gets onboard. This is followed by a correction. The second phase, typically the longest, is known as the ‘wall of worry’ phase. This is when more and more institutions start to come onboard, the sector receives more and more media coverage, but there is still a great deal of incredulity and denial. People think they are too late to invest.

Finally, we have the euphoria – the mania phase – where the proverbial shoe shine boy starts giving you advice.

If you look at stock markets, you saw this stealth phase between 1980 and 1987, before we got the crash. From 1987 to the Asian crisis of 1998 we enjoyed phase two, the ‘wall of worry’ phase. Then from 1999 to 2000 came the insanity.

This is a fairly arbitrary cycle of course. But I would argue that we are somewhere in phase two in this gold bull market. I am still amazed at how few people actually own gold. Phase one, the stealth phase, was between 2001 and 2008 and ended with that bone-shaking meltdown.

Gold consistently found support during phase-one pullbacks at its one-year or 252-day moving average. With the acceleration that you often see in part two, perhaps the 144-day moving average will define this second ‘wall of worry’ phase, consistently marking support. We shall see.

The 252-day moving average still works for gold stocks

For gold stocks, however, the 252-day moving average has been dependable. It was a fairly reliable guide to rough entry points into the sector from 2001 to 2008, but here we see what a remarkable marker it has been since 2009. This a chart of GDX, the exchange-traded fund (ETF) for the major gold stocks:

It’s amazing to see how it ‘kissed’ the average in early August 2010, before its stellar run since. Just as I am looking for gold to head back to about $1,300 and its 144-day moving average, I am looking for GDX to head back to the $51-52 area, another 10% or so from here.

For those who want to track the chart, here is a live link.

By the way, it’s worth noting how gold made three attempts to break through the $1,425 mark and failed. But as gold was making its third attempt, the gold stocks were putting in a much lower high. That is your ‘bearish divergence’. Gold’s move was not confirmed by the stocks, which were weaker. The stocks did not ‘believe’ the move. That is often a sign of trouble ahead.

It’s also worth noting that since its first November high, gold has lagged the broader US indices, which have gone on to post higher highs. Like gold, however, emerging market indices also lagged.

As I have noted before, we have been in an ‘all-one-market’ environment, where all asset classes rise as the US dollar falls and vice versa. But if, as we’re seeing now, not all markets are rising together anymore, then we have something to think about. Just as gold’s high was unconfirmed by the gold stocks, the S&P 500’s recent high has been unconfirmed by other global indices. That could portend trouble ahead for the US market.

Nevertheless, I am looking for a turbulent month which should see a move for gold back to its 144-day moving average, where I am guessing it might find support. That – hopefully – will mark yet another entry-point into this wonderful bull market.

Buy Physical Gold now at the world’s largest and safest repository.

Originally published by Gold Investment Advice

Speculating in Gold – Is Gold too Expensive to buy now?

admin — Tue, 07 Sep 2010 22:57:28 +0000

by Adrian Ash

So gold is now at “fair value” says Bill Bonner, long-time gold bug and my former boss/partner-in-crime at The Daily Reckoning’s London HQ.

No, he won’t sell yet…if ever…says Bill. But gold’s huge under- pricing a decade ago has clearly passed by. Value-hungry investors got their “reversion to the mean,” and in the form of 400% gains, too. What one ounce of gold bought 2,000 years ago – a good suit of clothes, in Bill’s oft-repeated example – it now matches, if not exceeds in price, here in late 2010.

From here, that makes it a “speculation”.

Never mind that, around the birth of Christ, all clothes were hand-cut and sewn locally…rather than glued together by the world’s cheapest labor, four or eight thousand miles away. A suitable outfit for visiting the coliseum or agora would have been made-to-measure, too…and today’s finest tailors, at least in London or New York, will ask much more than the $1240 you’d raise by selling one ounce at current “spot gold” prices.

Never mind all that. Because Bill’s point is well made, again…

Is Gold too Expensive to buy now?

Gold was a screaming buy at the start of last decade, sinking to its lowest price – in real terms – since the early ’70s, as the chart above shows (courtesy of the World Gold Council, and taken from Roy Jastram’s incomparable study, The Golden Constant).

But “Nobody cared! Nobody was interested,” as a (very drunken) London dealer cried at me late last year. “I’d email out jokes, porn-site links, anything to get clients reading so I could repeat three simple words: ‘Buy gold now!’

“But they didn’t care… I don’t even know if they looked at the porn…”

Today, in contrast, you can’t move for anxious investors and bullish hedge funds piling into gold. Or so the media coverage would make it seem. New gold dealers – online and on Wall Street – are meantime sprouting like fungus to catch the “retail dollar”, and the story’s grown so old, it’s even spawned its own calendar for financial hacks (the summer lull, India’s post-harvest festivals, quarterly data from the mining-backed World Gold Council, the Sept-end of each year of the Central Bank Gold Agreement). Wherever you look, the only debate that counts – “It must be a bubble, so when will it burst?” – rolls on for what is now more than two years.

As for the dumb lump of metal, yes – it continues to pull in new money, nudging its purchasing power ever-closer to the big top of 1980. But look again at that chart above. For while Roy Jastram saw a “golden constant” in his two centuries of US data (and four centuries of British gold prices), the shorter-term volatility is striking. Not least since gold ceased being money 39 years ago, and became mere trinkets and collectibles instead.

“In terms of what gold will buy, it does not seem undervalued to us,” Bill Bonner writes. “As near as we can tell, gold is now fairly priced.

“[So] the reward now is different. It is speculative…not inherent. We cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean.”

But what is gold’s mean purchasing power – the “golden constant” of Jastram’s peerless research? By our reckoning here at BullionVault today, it has risen sharply since the US abandoned its last pretence of a gold standard and floated the dollar in August 1971. Compared with the first seven decades of the 20th century, in fact, gold’s real purchasing power has stood more than 75% higher on average. Which seems odd. Because without being used as money – its only utility beyond decoration – gold became only more valuable. So while its purchasing power may have looked “constant” across long historical periods from Roy Jastram’s vantage of 1977 (and again to die-hard gold bugs 20 years later), its utility had in fact changed.

Gold became more useful as a way of storing purchasing power, even though it was no longer money. Or rather, because it was no longer money, in an age where “Every morning, when you look in the mirror, I want you to think ‘What am I going to do today to increase the money supply?’…” as John Ehrlichman, assistant to Richard Nixon, apparently told Fed governor Charles Pardee, sometime in the early 1970s. Post-war economic policy across the West was haunted by the Great Depression, and thus flowed from the fear that, unless money was losing value, then spending and particularly investment growth would grind to a halt.

Without the spur of inflation, capital would choose to sit tight – in purses, pockets and deposit accounts – because its purchasing power today would be retained tomorrow. Savers could thus spend (or not) as they chose, rather than being forced to exchange or grow their money to realize or maintain its present value. Devaluing their money, in contrast, via persistent (and obvious) inflation would force savers into the stores and stock-broker’s office. And thus today’s targets for persistent (and obvious) inflation were born.

“[Harvard professor] Kenneth Rogoff is proposing that the United States use a burst of inflation to get out of its slump,” writes Princeton professor Paul Krugman. “I agree…[but] if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period…[not Rogoff’s] two or three years of slightly elevated inflation.”

Bill Bonner is bang on the money, in short. Gold from here is a speculation, but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme – massive new money inflation.

What price will you assign to gold’s utility as a store of real value if…when…they succeed?

Regards,

Adrian Ash

Note: Formerly the City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

Comments?

What will the price of gold now in the next 12 months? Are you a buyer or a seller?

Originally published by Gold Investment Advice