IF YOU'RE A GOLD INVESTOR, YOU'RE CERTAINLY ASKING THIS QUESTION
LATELY.
Seeing the price of gold -- which hit an all-time high of $1423/ounce on the first trading day of 2011 -- plunge over $100 in the ensuing three weeks would have any rational investor pondering that question ... some days with terse repetition.
Perhaps if I showed you a 5 year chart on gold prices, it may alleviate your anxiety and reinforce the bullish conviction on your shiny investment.
Here's a 5 year chart on a continuous front month Gold Futures contract ...
Gold prices have nearly tripled on this chart, and any technical analyst will agree that this chart looks pretty solid if you're bullish. However, this is indeed a 5 year chart and, like every investor and trader that I know (yours truly included), our attention span has the shelf life of a gnat.
We're focusing on that $100 drop, and all of a sudden we start to ponder the possibility of gold going back to under $300 an ounce.
Another way of looking at swift corrections on long term bullish chart patterns is to find areas of opportunity to put fresh money to work. Until technical patterns are broken, pull backs can be very profitable.
Levels of Opportunity
With the long term trend still intact on the 5 year chart, let's take a look at an intermediate chart to hone in on some key technical levels that would present good buying opportunities if you're bullish on gold.
Weekly chart of Gold, April Futures Contract ...
The red trend line shows $1320 as key support. It did break and close below that level just before the Egyptian political unrest broke out. As the Middle East uncertainty intensified, gold popped sharply and is now trading at $1364.
If you are long term bullish on Gold, you can make the case that gold is a buy right here. If you are a short term to intermediate trader, $1320 is possibly your entry point. The green arrow corresponds with the 5 year chart where the long term trend line rests. The level is somewhere between the 1320-1280 level (between the red trend line and the green horizontal support line).
If gold does indeed trade below the 1280 level for several trading days, the trend, in my opinion, may be in jeopardy until price action reverses.
Why Gold Continues to be a Compelling Asset
Gold has always been considered to be a "safe haven" investment as a hedge against inflationary pressures, economic uncertainty, and political instability.
We just witnessed a sharp pop in price action as political unrest, riots, and uncertainty in the Middle East intensified. The events are still ongoing, and there is a chance that contagion could spread to neighboring countries in the region.
But probably one of the most powerful attributes that drives the price of gold is its role as a hedge against fiat currency devaluation. Since the credit crisis, the United States Federal Reserve has instituted 2 rounds of ultra-loose monetary easing programs that have swelled their balance sheet to the point where it will approach $3 Trillion by summer time.
Fiscal governance has not been too far behind, embarking on a third year of running Trillion dollar deficits. The Congressional Budget Office projects that the 2011 budget deficit will set a new record, eclipsing 2009.
The dilution of the US Dollar, which is currently the reserve currency of the world, is directly reflected in gold's bullish trend.
Fed Chairman Ben Bernanke testified in front of the House Budget Committee yesterday.
His remarks continue to maintain the ultra-loose monetary position, and it may continue for an extended period. Mr. Bernanke again states that the unemployment rate is likely to remain high for some time and, "The extent to which the recovery is established and inflation is pointing higher or lower will help determine whether the Fed expands or pulls back on the stimulus."
Further highlighting the importance of gold as a hedge and alternative storage of value versus fiat currency, J.P. Morgan announced that it will now accept gold as collateral for lending. J.P. Morgan will now allow clients to essentially use the metal as collateral for borrowing funds to invest in other assets.
This move virtually proclaims gold as a triple A top tier asset that will be readily acceptable like "rock solid" risk free U.S. Treasury Bonds. This further strengthens gold's position as an alternative reserve currency.
Is This the Year of the Rabbit… or the Tortoise?
Rising global inflation has been the big story and the major issue that central banks have to deal with. Many emerging markets like Brazil, India, and Indonesia are forced to raise interest rates to combat rising prices.
Generally, rising interest rates are bearish for gold prices, as investors sell the hard asset to chase higher yields and enjoy increased returns on their currency.
While the emerging markets are raising rates aggressively, the real liquidity and safety lies in the developed countries' rates and yields.
The United States has flat out stated that rates will remain low for an "extended period". The European Central Bank has publicly stated that inflation is an issue and must be dealt with. However, the prior two meetings left rates unchanged and the ECB Chairman has shifted his stance to a more dovish tone. The reality is that, with all the sovereign debt issues, many of the struggling partners cannot absorb higher rates in the short term.
The U.K. has inflation issues as well. However, the 4th quarter GDP saw their economy actually contract by 0.5%. The rhetoric out of the Bank of England is hawkish, but actions speak loudest. By the time you read this article, the BOE will have announced their interest rate policy statement. Leave me a comment and let me know if they raised interest rates.
Finally, the financial markets have been closely watching how China handles their inflationary pressures. The Chinese economy is vital to a strong global recovery, and consumer price inflation has been running red hot. The last several monthly readings have been averaging 5.0%, and they will be announcing January CPI soon.
China raised interest rates for the third time since October on Monday evening during the Lunar New Year holiday. The 0.25 basis point rate hike sets the 1 year deposit rate now at 3.00%.
With CPI north of 5.00% and interest rates at 3.00%, the bank deposit returns are far lagging rising prices. This effect is actually producing negative real returns as prices rise faster than interest earned.
China is in a tough spot to try and slow the rate of inflation without choking their economic momentum. If they employ a very slow interest rate hike policy, the inflation pressures will continue to weigh on the consumer heavily. If they raise rates aggressively, their economy will likely head towards a hard landing.
The bottom line is that China and the developed world will choose door A and keep interest rates on the low side. This is another reason to be bullish on gold, even in a rising interest rate environment.
Seeing the price of gold -- which hit an all-time high of $1423/ounce on the first trading day of 2011 -- plunge over $100 in the ensuing three weeks would have any rational investor pondering that question ... some days with terse repetition.
Perhaps if I showed you a 5 year chart on gold prices, it may alleviate your anxiety and reinforce the bullish conviction on your shiny investment.
Here's a 5 year chart on a continuous front month Gold Futures contract ...
(Click on image to enlarge)
Gold prices have nearly tripled on this chart, and any technical analyst will agree that this chart looks pretty solid if you're bullish. However, this is indeed a 5 year chart and, like every investor and trader that I know (yours truly included), our attention span has the shelf life of a gnat.
We're focusing on that $100 drop, and all of a sudden we start to ponder the possibility of gold going back to under $300 an ounce.
Another way of looking at swift corrections on long term bullish chart patterns is to find areas of opportunity to put fresh money to work. Until technical patterns are broken, pull backs can be very profitable.
Levels of Opportunity
With the long term trend still intact on the 5 year chart, let's take a look at an intermediate chart to hone in on some key technical levels that would present good buying opportunities if you're bullish on gold.
Weekly chart of Gold, April Futures Contract ...
(Click on image to enlarge)
The red trend line shows $1320 as key support. It did break and close below that level just before the Egyptian political unrest broke out. As the Middle East uncertainty intensified, gold popped sharply and is now trading at $1364.
If you are long term bullish on Gold, you can make the case that gold is a buy right here. If you are a short term to intermediate trader, $1320 is possibly your entry point. The green arrow corresponds with the 5 year chart where the long term trend line rests. The level is somewhere between the 1320-1280 level (between the red trend line and the green horizontal support line).
If gold does indeed trade below the 1280 level for several trading days, the trend, in my opinion, may be in jeopardy until price action reverses.
Why Gold Continues to be a Compelling Asset
Gold has always been considered to be a "safe haven" investment as a hedge against inflationary pressures, economic uncertainty, and political instability.
We just witnessed a sharp pop in price action as political unrest, riots, and uncertainty in the Middle East intensified. The events are still ongoing, and there is a chance that contagion could spread to neighboring countries in the region.
But probably one of the most powerful attributes that drives the price of gold is its role as a hedge against fiat currency devaluation. Since the credit crisis, the United States Federal Reserve has instituted 2 rounds of ultra-loose monetary easing programs that have swelled their balance sheet to the point where it will approach $3 Trillion by summer time.
Fiscal governance has not been too far behind, embarking on a third year of running Trillion dollar deficits. The Congressional Budget Office projects that the 2011 budget deficit will set a new record, eclipsing 2009.
The dilution of the US Dollar, which is currently the reserve currency of the world, is directly reflected in gold's bullish trend.
Fed Chairman Ben Bernanke testified in front of the House Budget Committee yesterday.
His remarks continue to maintain the ultra-loose monetary position, and it may continue for an extended period. Mr. Bernanke again states that the unemployment rate is likely to remain high for some time and, "The extent to which the recovery is established and inflation is pointing higher or lower will help determine whether the Fed expands or pulls back on the stimulus."
Further highlighting the importance of gold as a hedge and alternative storage of value versus fiat currency, J.P. Morgan announced that it will now accept gold as collateral for lending. J.P. Morgan will now allow clients to essentially use the metal as collateral for borrowing funds to invest in other assets.
This move virtually proclaims gold as a triple A top tier asset that will be readily acceptable like "rock solid" risk free U.S. Treasury Bonds. This further strengthens gold's position as an alternative reserve currency.
Is This the Year of the Rabbit… or the Tortoise?
Rising global inflation has been the big story and the major issue that central banks have to deal with. Many emerging markets like Brazil, India, and Indonesia are forced to raise interest rates to combat rising prices.
Generally, rising interest rates are bearish for gold prices, as investors sell the hard asset to chase higher yields and enjoy increased returns on their currency.
While the emerging markets are raising rates aggressively, the real liquidity and safety lies in the developed countries' rates and yields.
The United States has flat out stated that rates will remain low for an "extended period". The European Central Bank has publicly stated that inflation is an issue and must be dealt with. However, the prior two meetings left rates unchanged and the ECB Chairman has shifted his stance to a more dovish tone. The reality is that, with all the sovereign debt issues, many of the struggling partners cannot absorb higher rates in the short term.
The U.K. has inflation issues as well. However, the 4th quarter GDP saw their economy actually contract by 0.5%. The rhetoric out of the Bank of England is hawkish, but actions speak loudest. By the time you read this article, the BOE will have announced their interest rate policy statement. Leave me a comment and let me know if they raised interest rates.
Finally, the financial markets have been closely watching how China handles their inflationary pressures. The Chinese economy is vital to a strong global recovery, and consumer price inflation has been running red hot. The last several monthly readings have been averaging 5.0%, and they will be announcing January CPI soon.
China raised interest rates for the third time since October on Monday evening during the Lunar New Year holiday. The 0.25 basis point rate hike sets the 1 year deposit rate now at 3.00%.
With CPI north of 5.00% and interest rates at 3.00%, the bank deposit returns are far lagging rising prices. This effect is actually producing negative real returns as prices rise faster than interest earned.
China is in a tough spot to try and slow the rate of inflation without choking their economic momentum. If they employ a very slow interest rate hike policy, the inflation pressures will continue to weigh on the consumer heavily. If they raise rates aggressively, their economy will likely head towards a hard landing.
The bottom line is that China and the developed world will choose door A and keep interest rates on the low side. This is another reason to be bullish on gold, even in a rising interest rate environment.
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