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This
essay is based on the Premium Update posted on February 19th, 2010
Investing your money in a long-term position can be
likened to navigating a ship to port. The compass (fundamental and technical
analysis) points you in the right direction as you head out to sea. Even if
your ship is sturdy (you have made the right call and are heading in the
right direction) every once in a while a big, unexpected wave seems to push
you off course.
And without question, since the beginning of the
economic crisis, the seas have become especially turbulent.
One such wave was the announcement this Wednesday by
the IMF
that it would begin phased open-market sales of the remaining 191.3 tons of
gold it plans to sell under a program launched last year to raise money for
lending. The price of gold dropped 1 percent on the news.
To remind
you, this comes nearly four months after India purchased 200 tons from the
IMF, news that helped push the price of gold up. So what is the difference?
The IMF
had announced last year that it would sell 403.3 tons of gold, about
one-eighth of its total stock. Until now, the gold has been made available
only to central banks on a first-come-first-serve basis. So far, India -- the
world's biggest consumer of gold -- Mauritius and Sri Lanka have purchased a total of 212 tons
of IMF gold. The average price for the three sales was a little over $1,050
an ounce, generating about $7.2 billion in proceeds.
In a
carefully worded press release, the IMF said that “in accordance with
the priority of avoiding disruption of the gold market, the on-market sales
will be conducted in a phased manner over time.”
The press
release further noted that this does not preclude off-market sales directly
to interested central banks.
It is
well known that China is interested in increasing its gold reserves. China is
sitting on top of a huge mountain of dollar reserves. In fact, a day before
the IMF announcement, the US Treasury Department released data showing that
Japan overtook China to become the world's biggest foreign holder of U.S.
Treasury debt, reclaiming the title for the first time in more than a year.
China shed more than $34 billion in long-and-short-term Treasury debt in
December, while Japan added $11.5 billion, according to the monthly Treasury
International Capital report.
So, it
wouldn’t surprise anyone if China steps in and buys some of the IMF
gold. Perhaps, as was mentioned in last week’s Premium Update, China is
waiting for a better price.
We
believe that the IMF announcement will have a negligible effect on the
long-term price of gold. The IMF said it would stagger the sales. But even if
it were to dump all the tons at once, it seems that they would be almost
immediately absorbed by China, Russia, Middle Eastern sovereign funds and
other central banks.
In this
case, it seems that we don’t need a
confirmation that gold is still a very-long-term buy in the form of the news
that George Soros charged into gold during the fourth quarter even
despite the fact that gold prices had already run up substantially. He
doubled the stake of his fund in the world's largest gold ETF, becoming the
fourth- largest holder in the SPDR Gold Trust. As of December 31, gold is
Soros’s largest single investment.
Moving
back to the analogy from the beginning of this update - we have set our
course and we will keep a close eye on the charts to get us safely to port.
This week, we prepared two charts for you - one featuring gold, and the
second one with one of our unique indicators. Let's
begin with the gold market (charts courtesy of http://stockcharts.com.)
 
In the
previous essay we wrote the following:
(…)
we see that the similarity that was present during the latest decline is
still present after gold bottomed. This time, however, it suggests that gold
may soon need to consolidate for a week or so - just like it took place in
the past. Please take a look at the areas marked with red rectangles - gold
paused when it moved to the declining short-term resistance line (April
2009), or it broke above it and then verified it as support (October 2008,
July 2009). Should history repeat once again, we can see a similar pattern
also this time (…)
These
comments are up-to-date also this week, only this time we already know that
gold moved above the declining resistance line, just like it did in July 2009
and September 2008. This means that gold may need to form a temporary top
here, which would take gold lower, most likely to the $105 - $107 area in the
GLD ETF.
Is gold
likely to have topped right now? Not necessarily, based on the situation in
the RSI indicator. In the past this particular indicator needed to move to
the level marked with the dashed red line before the temporary top was in.
Currently, the RSI indicator is visibly below it, so we may see additional
several days of higher prices before gold declines significantly.
The
Stochastic indicator is above the 80 level, just like it was the case in the
past during local tops, but it has also stayed there for some time before the
top has been put, so it is a necessary factor, but not sufficient one. In
other words, if Stochastic wasn't above 80 level, we would be reluctant to
say that we may see a temporary top soon, but since it is above 80 it doesn't
mean that the top is in.
Given the
historical performance of the yellow metal, we might expect the consecutive
decline to be rather small (the preceding downswing is not even close to
being as dramatic as the 2008 one), so it seems that it is not much of an
opportunity for shorting the precious metals market, unless we see a
confirmation that general stock market's decline can cause PMs to plunge.
The last
chart that we would like to feature this week is the one featuring one of our
own indicators - the SP Gold Bottom Indicator.
According
to its name, the above indicator provides buy signals for gold. The buy
signal is given, when indicator breaks down lower dashed line, or when it
breaks up through the upper dashed line. Since it has just moved above the
lower line, it means that it will move below it sooner or later, most likely
during the coming small correction, thus generating a buy signal.
Summing
up,
the precious metals market has moved higher, and it appears that it will need
to take a small breather relatively soon. Gold, silver, and PM stocks are
currently following the general stock market more closely than the follow the
USD Index. This is a positive factor in the very-short-term (main stock
indices are rising), but negative in the long run because the situation on
the general stock market is still bearish from the long-term point of view.
Meanwhile,
one of our unique indicators is about to flash a buy signal. This is positive
news for the whole precious metals market, not only for gold itself, but we
still need to monitor the situation on the general stock market and check how
gold corresponds. Several days of divergence between PMs and the main stock
indices will most likely be enough to let us know that PMs are ready to rise
once again. For now, we must remain cautious. Naturally, we will keep our
Subscribers updated.
To make sure that you are notified
once the new features are implemented, and get immediate access to my free
thoughts on the market, including information not available publicly, I urge
you to sign up for my free e-mail list. Sign
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Thank you for reading. Have a
great and profitable week!
Przemyslaw Radomski
Editor,
www.sunshineprofits.com
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