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Today's Market WrapUp 01.29.2009 Mon Tue Wed Thu Fri Park Archive Feelings aside: Is gold more likely a buy or a sell here? Let me admit that I am no gold bug. Over the years at our management firm, we have bought gold and we have sold gold. We have made some money on gold a couple of times, but we have no particular attraction or affinity for it. It pays no income to hold it; it serves little practical purpose for humans or the planet. I find no reason to love it. Our last trade in gold was a sell last May. As gold broke down from its $1000 peak, and gold shares began to tumble with everything else, our sell rules triggered and we sold our positions. In recent months, as the global recession spread and risk markets imploded, we continued to chart gold faithfully. As Richard Russell pleads passionately for gold as world currency, we have read with interest and continued to chart gold carefully. As commentators have increasingly proclaimed the end of the US dollar and the irrelevance of fiat currencies, we have listened and continued to chart gold carefully. As GATA members proclaim government conspiracies to manipulate and control it, we have continued to watch gold carefully. As increasing throngs forecast the collapse of the world banking system we have continued to watch gold carefully. When asked about gold by the media, I have repeatedly said that we would buy gold again if we got a buy on our rules. Until then, we wouldn’t. Evidently such impartial commentary enrages some. Time and again, I have tried to assure that it is nothing personal; we just need a break out on our metrics before we can see a buy on gold. But as time goes on and gold prices fail to break through last spring’s peak, one can’t help but ponder this: is gold more likely to be a buy or a sell here? Let’s look at the chart:
Since 2001 and for 7 long years as the US dollar fell, the price of gold had an exceptionally good run of more than 300%. But as the US dollar broke out last January gold broke down. Since then as the great reckoning broke loose in the global economy, we have seen gold make lower highs, and lower lows. I don’t profess to know the future. But with all the carnage that has hit the world this past year, shouldn’t gold have made a fresh high by now? If the economic world does come to an end any time soon, then gold may well break higher still. But the alternate scenario should also be considered. Maybe-- just maybe the worst of this market crisis is now passing by. Yes the US has a lot of problems. But the rest of the world is in tatters too, and relatively speaking most are worse off. Incredible to suggest I know, but what if the US stock market manages the now largely unexpected and begins to buck up? Let’s look at this chart of the S&P 500 and compare it to the chart above of gold:
Fourteen months into this bear market, the S&P has lost more than 40% and is now at monthly price support last touched in 2003. In relative strength, the US market is now more oversold than it has been at any time in over 20 years. Meanwhile, gold has so far lingered within 10% of its all time high. Investing is about weighing probable outcomes. This is really all we have. When we look at the two charts above, we must focus on practical questions. With gold at an 8-year high, and the S&P at a 6-year low, we must ask ourselves which asset has the greater probability of outperforming now? The January issue of National Geographic did a front cover feature on “Gold. The true cost of a global obsession.” Leaving aside the contrarian sentiment arguments one could see in this mainstream coverage, the article brings up some interesting facts on gold:
The most bullish argument I hear for gold is that retail investors, now sacred out-of-their-wits by the global downturn, mistrusting governments and paper money, will continue to feverishly snatch up gold bars, coins, wafers and gold ETF's. Maybe they will; but for how much longer? They can’t eat or drink it. They can’t use it for shelter; it won’t pay them an income. Even gold-obsessed East Indians generally stop buying gold to collect when its price passes $750 an ounce. East Indian demand collapsed last year, with India’s gold imports plunging 81% in December. Maybe with the on-going implosion of hedge funds that were recklessly speculating in this and other commodities over the past 7 years, dumb money is gone for a while, and gold prices will continue to fall. Maybe the world won’t end and the US dollar won’t lose its benchmark status- at least just yet. Maybe the beleaguered stock market will start to recover this year and gold will continue to contract from its multi-year high. Based on history at least, it would seem that gold’s inevitable reversion to the mean is now overdue. Danielle Park Copyright © 2008 All rights reserved. CONTACT
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