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This Hasn't Happened to Gold Since 1998

February 25, 2013 | About:
taipanpublishing

taipanpublishing

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The last three weeks have been torrid for gold investors. Over that time, the gold price has fallen by about $100 — a loss of about 5%.

And unless gold closes above $1,605 per oz., gold will see a "death cross" of its 50-day and 200-day moving averages.

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In other words, its 50-day moving average will cross below its 200-day moving average — which hasn't happened since 1998.

I don't recommend you try to trade gold. Instead, you should think of gold as a form of "cash" that central banks cannot print.

Gold is an honest currency. You own gold because it makes more sense to keep some of your cash out of the reach of overzealous central bankers. In other words, gold is not an "investment" in the traditional meaning of the word. So these kinds of short-term moves are not hugely significant.

That said, you need to keep an eye on whether one of these short-term moves breaches a longer-term trend.

This hasn't happened yet. But I'm watching the $1,520 per oz. level closely. That's because since September 2011, gold has been trading in a price range between about $1,520 per oz. and $1,800 per oz. So a definitive break below $1,520 per oz. would be something entirely new, and not at all bullish.

There have been eight "death crosses" in gold since 1975. And although the average returns for the following week and month have been a gain of 0.69% and 0.5%, respectively, the returns over the following three months and six months have been mostly negative (-0.64% and -1.56%, respectively).

The last time we saw a "death cross" in gold, in December 1998, gold fell more than 10% over the following six months. If we see that kind of decline again this time around, it would put gold at $1,424 per oz six months from now (a rupture of its recent trading range).

There are many drivers of the gold price. Weak demand from India and the recent Chinese Lunar New Year celebrations would certainly have a big impact.

But we also have an increasingly complacent investor mindset in developed world economies, where stock markets are rallying in conjunction with massive central bank stimulus. The "fear factor," in other words, is significantly lower today than it was at any point in 2012.

To be honest, it's hard to make sense of the gold sell-off. Central banks around the world are aggressively printing money, and yet the world's only unprintable currency — gold — is selling off. Gold mining stocks are also suffering badly and have reached multiyear lows.

Is there forced selling going on somewhere? We know George Soros has unwound a big position in gold ETF GLD. Is there some big gold trade unwind going on we don't know about? Sure feels like it.

The fundamentals, as we see them, are still supportive of gold. Every developed country is now printing money without limit. And 38 countries around the world are pursuing a zero or negative real interest rate policy. Now is not the time for gold investors to panic.

Gold has been in a secular bull market for over a decade. But it is now down more than 10% from last October's 52-week high — putting it officially in correction territory.

That is normal for an asset that has been in bull mode for so long. For now, just remember that nothing goes up in a straight line. And be prepared for further price weakness over the short term.


Rating: 4.4/5 (5 votes)

Comments

blainehodder
Blainehodder - 1 year ago


This is still a value investing site right? Or is that pretty much over?
batbeer2
Batbeer2 premium member - 1 year ago
>> This is still a value investing site right? Or is that pretty much over?

Right.

How about having a look at Signet. If gold has come down 10% since october, Signet has lost about $ 100m in that period (conservative 10% of inventory).

That's a significant sum for a company earning $250m-$350m per annum.

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