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Archive for December, 2009
Are Gold Stocks Better than the Physical Metal Itself
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Are Gold Stocks Better than the Physical Metal Itself? I personally do not believe so, but there is a tool for every job inside of any portfolio. But let’s look at some interesting points:
1. There is no one between you and physical gold (unless you have a company store it for you)
2. It cannot disappear due to creative accounting
3. Company’s cannot mismanage it
4. Gold cannot go bankrupt like a company
He who controls the asset has the power. Consider that if you have an asset in your possession, that no one has more control than you. For that very reason alone, physical gold is better than paper. But let’s look at gold stock performance in the past compared to the Dow and physical gold.
Gold stocks do not follow the physical metal exactly. “The performance of gold stocks at the end of 1987 should serve as a reminder to investors that these issues are still stocks and vulnerable like other equities during bouts of market weakness,” said gold fund portfolio manager at United Services in San Antonio, in the Investor’s Business Daily.In October of 1987 following Black Monday the Dow lost 41%, falling from 2,746 to 1,616. During that same period gold stocks (XAU), lost 46%, falling from 157 to 84. During that same period physical gold rose over 18%.
Following these initial losses in the Dow and gold stocks, gold stocks stayed down longer than the Dow. In fact the XAU finished 1988, over one year later, virtually unchanged while the Dow recouped close to half of what it lost. Over a 26 year period the Dow fell by 10% or more over 25 times, while gold stocks fell by a larger percentage and more often.
Performance isn’t the only consideration. Gold mining companies can go bankrupt for a variety of reasons, rendering their stock worthless.
If the paper dollar fails you have something in your possession that can be bartered with or exchanged for any other currency on the planet.
Finally, physical gold is portable, therefore can go with you anywhere you want. For these reasons I like the physical metal in my portfolio over any other form of gold.
Gold Trend for 2009
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People always wonder when any investment goes down if it is smart to buy in at that time. Peoples’ minds run wild with concern when there are corrections in any market they are invested in. What one must follow are the trends. Look at the chart above. This chart says it all. There have been many ups and downs in the gold market this year, some small and some large, however the trend is positive. Gold has been in a long-term positive trend cycle since 1999. Don’t let the normal market action from day to day be of concern. When putting money into anything for the long-term one must only concern themselves with the trend.
What goes up must come down, this is healthy. If the market were only to rise with out building support along the way it will most likely crash hard. It is like building a house without laying a foundation. All markets trade within a trading range, with support on the bottom and resistance on the top. Without getting too technical, the market will try to test support on the bottom, and if it breaks it, the market will then test the next support level. If it breaks resistance on the top it will try to test the next resistance level. Essentially this is a trading range. Look at gold in the chart above. It tested resistance at $1,000 twice this year before it finally broke it. Then it built a foundation above $1,000. It rose rapidly to $1,200 per ounce before correcting; no foundation has been built above $1,100 yet.
If gold rises above $1,100 and stays above it, it will build a foundation and possibly test the $1,225 mark again. The net net is follow the trend and apply funds for the long-term. Allow money to work through the trends. Be in during bull markets and out during bear markets.
What’s Really Happening in the Gold Market Today?
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Gold just like any other market is subject to supply and demand factors. When supply is low and demand is high the price goes up and vice versa. To understand the gold market one must understand the term “spot” price.
Gold, mankind’s universal and timeless money and store of value, it is traded in many ways. The easiest and most direct way, and the way that governs millions of transactions every day, is cash payment followed by immediate delivery. In these transactions, the agreed upon benchmark price is called the “spot” price. Another term frequently used term for this type of transaction is the “cash” price. Many major gold brokers set a minimum number of ounces for a transaction at the spot price.
New buyers sometimes mistake a futures price for the spot price. They are not the same. A futures price is a market-generated quote for delivery of a fixed amount of gold (frequently 100 ounces) at a specific time in the future. This price will be higher than that moment’s spot (cash) price because 1) it must include fees for storage and delivery of the gold, and 2) finance charges because payment will not be made until the delivery date.
Another spot-related factor gold investors frequently neglect is transaction size. Ten transactions of 10 ounces require a lot more time, expense, and effort on the part of a broker than one transaction of 100 ounces. In the international world of gold trading, size matters. Most buyers of gold do not buy at the spot price because the size of the transaction is too small. Most buyers are paying spot plus a premium. When supply is low the premium increases. Today expect to pay higher than $100 above the spot price for 1 gold bullion coin.
What you see being reported on everyday is the spot price of gold, and on an average day around 24 million ounces trades hands. You may have noticed that gold has been rising for around 10 years. Two major factors have contributed to this rise, liquidity and fear. So much money has been printed by the FED that it has to go somewhere. This liquidity raised all ships for a while. Real estate, stocks and gold all rose together for a window of time this decade.
Then we saw the collapse of the banking system in 2008 which has created fear, and gold values rose rapidly over the last year, from $870 per ounce at the end of 2008 to where it stands today at $1,137. Fear of inflation or a collapsing dollar will continue to put upward pressure on gold prices. In short, fear is what is driving the gold market today.
Why IMF Gold Sales Won’t Affect the Gold Market
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While the IMF gold sales are a positive sign, it won’t affect the gold market too heavily. What is positive for the gold market it that India bought the first half of the IMF offering. This points to the fact that foreign central banks will be net buyers of gold in 2009. They have been net sellers for over a decade.
If foreign central banks are buyers it shows that even the brightest financial minds are concerned about the dollar. This concern will continue to fuel the gold market, and buying of the precious metal worldwide. Gold sales are up this year and have been since 1999. In fact, China is encouraging their citizens to acquire precious metals, and stores are popping up all over the country to allow regular citizens to buy gold and silver.
The IMF still has roughly 200 tonnes for sale and there is much speculation as to which country will pick it up. But why will the sale of so much gold not have a major impact on prices worldwide? The answer is simple, about $28 billion worth of gold trades on the market everyday. India’s purchase of $6.7 billion was only about 23% of one day’s worth of trading. The fact is that this volume from the IMF is a drop in the bucket for the gold market.
The fact that foreign central banks are net buyers is very positive for the gold market. The recent purchase by India was very visible to the general public, and stirred up media coverage all over the world. So even though the purchase will not impact the gold market too significantly, the fact that the purchase happened is bringing gold to the fore front of peoples’ minds.
As more people buy gold around the world the price will rise, and will continue as long as demand out weighs supply. The price will rise until we see the third and final phase of this gold bull market where the price will experience a blow off top at which point it will correct and return to fundamental values. Until then enjoy!
Gold Market Ups & Downs
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Some people are concerned out there that gold is too high and will be coming down. My answer is, I hope it does. Ups and downs are part of any healthy bull market. The key to investing in anything is to identify trends. Gold has closed higher than the previous year close 8 years in a row. This is an upward trend. Gold has come all the way from a low of $252 per ounce. Sure there have been ups and downs all along the way, but that is what you want. If gold only rose and never corrected then we would be getting close to the end of the bull market.
Money in gold is made in the long-term. Buy and hold though the trend cycle. Don’t be scared when gold goes up and then corrects. For example, in March of 2008 gold rose to $1,032 per ounce and then corrected all the way down to $792 per ounce in October of the same year. People are always going to take profits all the way through the trend cycle. Gold as of this writing stands at $1,123. If you would have stayed out of the gold market just because gold was falling rapidly for 7 months in 2008 you would have missed out on some serious gains.
Will gold rise in the future? No one knows for sure, but what does the trend cycle say? The trend cycle would suggest that we still have a ways to go before this gold market tops out. The simplest way to analyze this would be to look at the three phases of a bull market and see which phase we are in. Many experts would suggest that we are in the second phase, which would point to the fact that we haven’t seen the third and final speculative/panic phase where gold will rise rapidly. To read more on the three phases of a bull market click on the underlined phrase in this sentence.
Any healthy gold market will have ups and downs, therefore it is important to identify trend cycles. We are in a rising trend currently so don’t let market corrections scare you, even if they seem to be a big one.
Is this Gold Bull Market Over?
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Is this gold bull market over? In order to answer this question one must have an understanding of how bull markets usually work. First let me say that no one has a crystal ball, and therefore no one knows for sure what will happen in this bull market. This is purely my opinion based upon how markets have functioned in the past.
Bull markets generally work in three phases, which I will call the accumulation, awareness and panic phase. In the first phase, the accumulation phase, the asset quietly goes up without too much attention being paid by Wall Street or the general public. The first phase of this gold bull market ran from 1999 until about 2005.
The second phase, the awareness phase, is where Wall Street and the general public, begins to pay attention and then participate at a higher level. Values begin climbing at a faster pace towards fundamental values. In my opinion this is where we are now. The evidence of this is very apparent. Commercials are popping up all over the TV and radio; people are beginning to talk casually about it and investment firms and foreign central banks are buying. Generally speaking the second phase will usually last five to seven years.
The third phase, the panic phase, is where everyone sees what is happening and everyone wants in. Wall Street and the general public are going all in buying up whatever they can. Values begin to go up very rapidly, far above fundamental values. This phase can be compared to the real estate market of 2004-2005 and the dot.com bubble of 1999-2000.
So is this gold bull market over? I say that we are no where close to the end. I believe that we are only in the second phase and that based upon what is going on with the dollar that we have 3-5 years to go before gold tops out. Some experts are saying that just to reach our inflation adjusted high of $850 per ounce in 1980, that gold values would have to reach somewhere around $2,300 per ounce.
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