Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Gold Bullion: A Belated Christmas Gift


You just never know with what action the yellow metal is going to surprise you next, making it infamously difficult to predict short-term movements.

I am spending a few days of the Christmas break at a village alongside the coastline of the Cape Town Peninsula. It is quaint, picturesque and simply an ideal location for enjoying quality time with the family. The only drawback is that it does become quite windy on occasion – at best not a highly predictable event. This reminds me of the erratic behavior of gold bullion – you just never know with what action the yellow metal is going to surprise you next, making it infamously difficult to predict short-term movements.

And true to form, just as traders were expecting a quiet Christmas period, gold again startled with a $15 jump, taking the price well clear of the $800-level. (The rally commenced more than a day prior to the assassination of Pakistan's Benazir Bhutto.) Interestingly, gold has never in its history recorded a month-end price above $800 and only closed above this level on two days during its 1980 surge, namely: $830 on January 18, 1980, and $850 on January 21, 1980. That, however, represented a blow-off with the price plunging to $737.50 a day later and falling further to $659 by the end of January.

It would seem that gold bulls may very well have reason next week to toast bullion saying good-bye to 2007 having achieved the $800 month-end milestone. There is, however, quite an important difference between 1980 and the present situation. In 1980 gold was in a parabolic rise, whereas since the low of $250 in 2001 gold has been rising methodically, mapping out consistently higher lows as shown below.

Click to enlarge


The upside breakout from the pennant consolidation pattern is a bullish technical development and looks well supported by the rising momentum (top section of graph) and MACD (bottom section of graph) indicators.

The gold price has not only strengthened in U.S. dollar terms, but has in fact been appreciating in most currencies – an indication of increased investment demand. The following graph and table (not yet reflecting the post-Christmas rally) clearly illustrate this phenomenon.

Click to enlarge

Source: Plexus Asset Management (based on data from I-Net)

Click to enlarge

Source: Plexus Asset Management (based on data from I-Net)

The pressing question is how sustainable bullion's uptrend is. Although the technical picture indicates a primary bull market, the fundamental situation offers both bullish and bearish arguments.

The arguments in favor of a rising gold price have been well documented and include: the possibility of ongoing pressure on the U.S. dollar, increasing global inflationary expectations, a surging oil price, minimal new mine production, and the fact that central bank sales are capped through the Central Bank Gold Agreement (CBGA II).

The bears, on the other hand, point to: record long speculator positions that have in the past been strongly correlated with gold price corrections, potentially lower fabrication demand from India (as a result of the higher price), and a slowdown in producer de-hedging as the global hedge book diminishes. Additionally, a seasonally weak period is approaching from February to April as illustrated by the graph below.

Click to enlarge

I have over the past few months often conveyed my bullish stance on gold bullion and gold-mining stocks. Examples of these articles include: Gold: forwards and upwards (September 14, 2007) and Smart money bets on surging gold price (September 4, 2007). I see no reason to change this position – from both an absolute and safe-haven point of view. I would, however, caution that one should not chase a rising gold price in an attempt to stock up on the various gold-related instruments. Rather bide your time and wait for the short-term corrections that occur regularly, perhaps coinciding with the advent of seasonal weakness in a few weeks' time.

The final word goes to George Bernard Shaw who said: "The most important thing about money is to maintain its stability… You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos