There is a study published by the Credit Suisse and
the London Business School that says that gold prices have been too volatile
to play a reliable role as a hedge against inflation over the past 112 years.
While inflation does not reduce gold's real value,
it has no yield or income flow and the precious metal has given a far lower
long-term return than equities in the period since 1900, or 120 years, says
the study. Generally, the analysis is conducted based on periods when gold
was money and where it was not and we believe that these two should not be
We realize that gold does not give income or
interest. People invest in gold is a search for yield through capital
appreciation or as a safe haven – or as money. When interest rates are
close to zero or negative in real terms, gold begins to glimmer. The US,
Europe, the UK, China, India, gold’s biggest markets, all have negative
real interest rates. It is true that the past 112 years have not all been
good for the yellow metal. Yes, there are bull markets and there are bear
markets and we are in the midst of a bull market in gold right now.
In the period since 1900, gold gave a real return of
1.1 percent in sterling terms and its value fluctuated widely, said the
study. "Gold is the only asset that does not have its real value reduced
by inflation. It has a potential role in the portfolio of a risk-averse
investor concerned about inflation," it said. "However, this asset
does not provide an income flow and has generated low real returns over the
long term. Gold can fail to provide a positive real return over extended
True. That’s why we are invested now, while
gold is in the midst of a bull market. When it swings into a bear market
we’ll consider other options or perhaps evaluate the profitability and
risk of trading the downswing – impossible to tell at that point.
However, the key issue is that one does not have to be fully invested in the
precious metals sector during bear markets – what is the assumption of
Mohamed El-Erian, CEO and
co-chief investment officer of bond fund giant PIMCO, said that given the
fragile global economy and geopolitical risks, investors should be
underweight in equities while favoring "selected commodities" such
as gold and oil.
Obama seems to have run into a good streak of luck
in his bid to get reelected president. Just in the nick of time, the U.S.
economy is improving, at least as evidenced by last Friday’s jobs
report. Payrolls numbers are up by 243,000 jobs. Unemployment is down to 8.3
The Sunshine Profits Team extends our best
Valentine’s Day wishes. To see if you’ll fall in love with the
precious metals sector again, let's begin the technical part with the
analysis of the yellow metal. We will start with the very long-term chart
(charts courtesy by http://stockcharts.com.)
We begin with the chart of gold from a non-USD
perspective. Last week there was a weak consolidation from a non-USD
perspective and the strong similarities to the trading patterns of mid-2011
are no longer in place. With these developments, it is unlikely that a move
to the upside will be as sharp this time. We have seen two consolidations
this time and last year there was only one small stop, after which
gold’s price immediately shot upward. This chart suggests that a sharp
rally is not a likely probability and that further consolidation is quite
possible at this time.
In the long-term chart of gold from the perspective
of the Japanese yen, we see that the RSI level over 60 and this suggests that
the local top may be in or is at least close. In the past, when the RSI held
close to the 70 level for some time, local tops have been seen. Such is the
case today. Prices are also close to the middle of the trading range but not
at it, so a pause appears likely though not yet imminent.
So, will gold decline from here? Most likely yes,
but not very far. The additional confirmation of the short-term bearish case
comes from the general stock market, as gold has been recently moving in tune
with stocks. Consequently a turnaround in stocks could ignite a move lower in
gold as well.
The next local top in stocks will probably be close
to the level of the 2011 high. The recent trading pattern has been consistent
with the period leading up to the local top in 2010-11. In October-November
2010, declining prices were seen for a few weeks but were quickly followed by
a continuation of the rally. We may have a similar situation here.
RSI levels should be looked at as well and are also
indicating that a rally is likely ahead. It appears that it could last for
two to four weeks as the RSI level will then likely be close to 70. This has
coincided with local tops in the past.
The short-term (and short-term only) bearish case
for gold is further confirmed by the actual recent action in the silver
market which has followed what we outlined in our essay (February 10th,
2012) on the likely silver pullback:
Silver’s price has
been in a sideways trading pattern during the past two weeks after a strong
rally in which the red support-resistance line was pierced and volume levels
were significant. With silver now above this line, it seems that a move back
to it, a test of the breakout may in fact be seen. The 38.2% Fibonacci
retracement level based on the 2002 to 2011 rally is also in play and will
likely assist in stopping a decline as well.
medium and long-term outlook for silver remains bullish but – also
based on the analysis of the USD Index – the short term is now more
bearish than not.
Summing up, the outlook for gold remains bullish for the medium
and long term but is now rather bearish for the short term.
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Thank you for reading. Have a great and profitable week!