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Gold Investors: Don’t Get Caught Up With The Panic Of Herd

Friday June 28, 2013 11:36

Editor's Note: Seasoned Metals Analyst, Kira McCaffrey Brecht shares her extensive commodities knowledge on Kitco.com. Kira has been writing about the financial markets for over a decade -- posts during her career include Managing Editor at TraderPlanet, Chicago Bureau Chief at Futures World News, Market Analyst at Bridge News and Technical Analyst for MMS International and Managing Editor at SFO Magazine.

Surprise! The U.S. Federal Reserve isn't going to buy $85 billion in bonds per month forever. Tell me something we didn't already know. Talk about a herd mentality. The floodgates of selling hit markets across many asset classes this week.

At its mid June meeting, the U.S. Federal Reserve broadcast its forecast that the U.S. economy is improving and the start of its exit strategy or the "tapering" of its monthly bond purchases likely later this year.

Markets reacted as expected—stocks sold off, the dollar rallied and U.S. bonds sold off (while long-term yields climbed). Gold also got hit hard and the much talked about bearish triangle was confirmed.

Friday saw renewed physical buying in gold, some profit-taking on the recent sell-off and some safe-haven buying amid the collapse in U.S. equities. There will be two-way trade in gold ahead. However, the gold market is still vulnerable to more declines near term.

The best thing for physical gold investors to do is to be prepared and try to hedge physical exposure via put buying if you haven't already. Also, for those looking to beef up physical inventories, better buying spots will likely lie ahead.

The bearish triangle triggered on the daily gold chart, which opens the door to additional selling pressure. Whether you "believe" in technical analysis and chart reading or not, this triangle has been widely talked about in the gold community. When there are enough eyes on the same patterns, sometimes chart formations can become self-fulfilling prophecies. Best to buckle up and hang on for the ride.

Here's how triangles work. A triangle is a continuation pattern and once confirmed the preceding trend (in this case down) will resume. Triangles offer traders "measured move" targets or objectives.

Different chartists measure in slightly different ways, but the main idea is to take the widest portion of the triangle and apply it to the breakout point. See Figure 1. The lower trendline is the breakout point here.

In this case the triangle projects to roughly $1,200 an ounce.

Lower prices will offer price-sensisitive and savvy long-term gold investors an opportunity to buy. Gold remains a solid portfolio diversifier. As Jeffrey Christian, managing partner at CPM Group mentioned to me last month, gold has lost market share as a percentage of private sector wealth after the deregulations. But, on a global level it has been climbing since 2000 and that trend should continue.

In the 1960's gold represented about 5-6% of private sector wealth, Christian noted. But, by 2000 amid all the financial market deregulations, gold lost market share and that number slid to .2%. Since 2000, however, as more global investors are returning to physical gold as a long-term investment, that number has climbed to .9% of global private sector holdings as a percentage of their total portfolio, he said.

Chinese and Indian consumers will remain avid buyers in the years to come and that number will likely continue to grow. As savvy traders know, lower prices offer a buying opportunity.


By Kira Brecht, Kitco.com, follow her on Twitter @KiraBrecht

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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