As we watch the trading session winding down in New York we can see gold and silver have had a tremendous day, with gold starting out at $935/oz and progressing to touch $950 as we write.
On the positive side for gold we have oil closing at $100.88/barrel and a myriad of billion dollar rescue packages for inept bankers and financial institutions. These actions may well be necessary however they ultimately serve to undermine our confidence in assets of the paper nature. Plus the reasons we gave when we first posted on this site which were as follows:
- No new large discoveries of gold deposits dampening supply
- Lack of previous investment for gold exploration
- It takes up to 10 years to bring a new mine to production
- Falling gold production worldwide adding to its scarcity
- Gold EFTs take gold off the market thus reducing supply
- In the last Bull Run 70s to 80s gold prices increased 20 fold
- Metrics: DJIA vs. Gold, about 19ozs buys the dow jones, it has been 1:1 in the past and could be again in the future. Assuming the dow jones remains above 10,000 then the gold price could hit $10,000
- Gold at its previous high of $850 adjusted for inflation puts the gold price at $2000 plus
- Geopolitical uncertainty, a nuclear Iran creates world tension which pushes up the price of gold
- A Dictatorial South America imposing restrictions such as increased taxation and nationalisation will deter investment and reduce gold production
- India is growing and the sleeping dragon of China has awoken, their hunger for gold will drive gold prices higher
- Internet: information travels around the world in a nano-second, reactions to news, true or false, will add to the volatility of the gold price
- Web trading: increasing everyday, resulting in the trends being more exaggerated than ever before
- The mania that I traded in during the last Bull market will be nothing compared to the coming Gold price explosion and the maniacal actions of traders and everyday people in the precious metals sector.
The above reasons for investing in gold remain more or less intact and no doubt you could add a few of your own, so please feel free to do so.
Looking at the near term negatives that could effect gold we draw your attention to this snippet by Jon Nadler of Kitco.com who wrote the following:
“Gold demand in India, the world’s top gold consumer for jewellery and other uses, has suffered, Italian consumers have temporarily suspended orders, the Dubai gold market is not buzzing and Japanese retail investors are offloading.”
This serves as a word of caution before you bet the ranch on the golden bull powering further ahead. We are gold bulls and at times we suffer from mega doses of optimism. Throughout the summer we gave multiple buy signals for this sector. Recently we banked some profits as we judged it prudent to do so. However our only investments are in the precious metals sector which we consider to be gold, silver and uranium, we have no investments in the mainstream stock market and can not see ourselves investing there for at least a few more years.
Conventional wisdom suggests that we have between 5% and 15% of our portfolio invested in precious metals. Well apart from our ‘opportunity cash’ we are are lock, stock and barrel in this sector. A cavalier approach that will not suit everyone, but that’s what our small team of investors wishes. Your strategy is something that only you can decide and we implore you to read as widely as possible when formulating a strategy that fits your needs and objectives.
Just over the horizon we see the Federal Reserve slashing rates again by another 50 basis points adding downward pressure on the USD which has already taken a battering and could go into free fall if we get another 50 basis points cut. Taking a look at the chart we can see that the technical indicators are heading south, we may get a short snap back but it will be short lived.
Taking at look at the chart for gold we can see that it has come a long way in just six months justifying our summer BUY signals and rewarding gold bulls everywhere with a 40% gain since September 2007. Is it unstoppable? In the mid to long term we would have to say Yes. However, in the short term it would be reasonable for the gold bull to take a breather without damaging the up-trend and presenting us with another buying opportunity.
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All the best.
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