While it has come off its highs, gold is still up 30% this year and, many factors still point to a long term bull trend.
Author: David Levenstein
As we see the end of another year, and even though the price of gold has come off its highs of over $1225, the gold price gained some 30% this year. Now, as the dollar rebounds from it’s lows, and as most equity analysts are looking for global equities to continue upwards, there is talk that gold has made it’s high. While we are all entitled to our opinions, I believe that these analysts fail to see the bigger picture and that the price of gold has a long way to go before this bull market peaks.
From the 1980’s high of $850, gold was in a bear market for some 21 years. During those years, the International Monetary Fund (IMF) as well as most central banks around the world tried to sell as much gold as possible. Some of the sales were done with “impeccable” timing such as the sales made by the United Kingdom that sold a large portion of their gold during 1999 and 2002 when the price of gold was around $275. And, as these bankers disposed of their gold holdings, the bullion banks in London and New York kept going short gold by using the futures markets.
The reason for me mentioning this is because I believe there are still many people who are of the mindset of this era and fail to see that since 2001 gold has been in a very strong bull market and still is. And this bull market is far from over. Yet, even to this day, the major bullion banks in New York maintain unusually large short positions of gold. One simple trading rule is to always follow the trend. If they can’t see this upward trend, then perhaps they are looking at their charts upside down!
While the price of gold is influenced by many different factors, the major driving force has been the lack of confidence people have had in all the major currencies, especially the US dollar. And, as some of these currencies have done well against the US dollar, gold has gone up substantially against practically all these currencies. It has gone up against the US dollar, the British pound, the Canadian dollar, the Chinese Yuan, the Swiss Franc, the Russian Rubble, the South African Rand, and the Mexican Peso, just to mention a few.
Now, because the US dollar has lost more than 30% of its value since 2001, there are many investors who believe that it is set to rebound in a big way during 2010 and thereby cause a drop in the gold price. Frankly, I don’t see it. I still see the trend for the US dollar as downward, and while we may expect to see it rally during this down trend, I doubt that we are going to see a complete reversal in trend. How is this going to be possible when the current national debt of the US is around US$ 12 trillion and counting? And, while inflation remains very low worldwide, with these expansionary monetary policies, it is a matter of time before we see inflation increase. And, this will be just another catalyst for the gold price to make more new historic highs. When this happens the current price of gold will look like bargain prices.
As this financial crisis continues, it is expected that more countries will encounter financial problems. Already, there is talk about Ireland, Spain, the UK in addition to Greece and Dubai. And despite the fact the investors usually rush into the US dollar as the ultimate safe haven, it is a matter of time before they realize that things have changed and that the US dollar is not going to be the store of wealth that it once was.
Technicals
It seems that the current correction in the gold price has found good support above $1075. While there may still be more selling pressure in the gold market, I believe that we will see the end of this correction during the month of January.
All Things Considered – John’s Commentary:
There are a number of things to keep in mind. First, it took almost 19 months to build a firm enough base for gold to break decisively through $1000. It is not unreasonable for gold to come back and test that breakthrough as it builds a new solid base above $1000 – almost like a launching pad – to continue its upward climb. Second, to reach its 1980 high of $850, gold would have to climb to $2350 just to be even according to the government produced CPI. Using an unmanipulated inflation index published by ShadowStats.com (the same inflation measure used during the Carter Administration), gold would need to climb to $6,450. Third, only a very, very small portion of the U.S. (and global population) hold gold and silver in any form other than jewelry (estimated at 0.8%). Think about it – if you are a gold advocate – how many of your family and co-workers share your convictions? Most likely very few. This is to say that the mainstream and masses have not yet come into the market. Fourth, if you’re not in, you’ve got to get in. I remember when people were waiting to get in at $400 on a pullback from $475. They still aren’t in. Fifth, give me one good reason why the stock market should be rallying? Just one reason! Sixth, load up on silver if you haven’t already – it is dirt cheap!
What to do now? Simple! If you’re not in, begin today and average in – spreading your investment over the next three to six months. If you’re already in, buy more on this dip. Don’t try to squeeze the last dollar out of this correction – picking the bottom never works.
