Friday, December 4, 2009

Gold, is the luster off?

Gold is a timely topic today, as a friend so presciently pointed out yesterday. This morning the SPDR Gold Bullion Trust (GLD) is down 5%. I imagine funds that invest in the miners will see negative 10-12% results today, if the weakness continues into the close. The miner's are very volatile normally, so the result should be expected, though these results have not been observed very much this year. So the question is asked, is today's market seeing a tide change for gold? Is there continued price weakness ahead?

Recently, a detailed analysis of gold and the forces that work for and against it was posted on Financial Sense by Chris Puplava. He is very analytical in his work and uses a lot of charts to illustrate his message. Here is a link to his 11/25/2009 article for those interested in an in depth analysis.
Here is the conclusion he makes, for you bottom liners:

In short, an object in motion tends to stay in motion and that is certainly the case with gold. The bullish supports for gold are far greater than any bearish factors and even a USD rally may not stop gold as was seen in the 1st half of the 05/06 rally and the 2nd half of the 07/08 rally. Given that the IRD (interest rate differential) between the US Fed and other central banks is likely to weaken going forward, it is hard to envision a strong cyclical bull market in the USD that would derail gold. As shown from prior gold advances, gold may move close to the $1,500 an ounce mark before this advance is over, and relative to fiat currencies, the secular bull market in gold may continue until gold hits levels as high as $6,888 to $7,321 an ounce. You’ve heard many times over the past year that “the worst is yet ahead” in reference to the U.S. economy or credit markets. Well, in terms of gold it appears that “the best is yet ahead.”

Also on Financial Sense this morning is a contribution by Julian Philips, a gold bug writing from South Africa. His point is that gold has been recognized for its value as a reserve asset by central banks around the world. The outcome is central banks and sovereign wealth funds have become net buyers. His contention is that they have, until the recent past, been net sellers, seeing no use for maintaining gold balances. That change he contends has big implications for gold in the foreseeable future and even beyond.

These two points of view paint a very positive outlook for the metal. I want to add a little more perspective based on technical observations of gold’s price. My point is that the investor in gold and gold miners needs to have a strong tolerance for price changes. The shares of GLD have seen a very steady increase in value and the common stock of some of the miners have been increasing more which is attributed to having more volatility. One way to observe the difference is the standard deviation number which is an expression of volatility to be expected by the investor. For the uninitiated, the standard deviation is one statistical description that shows the potential price range of your investment asset, and how much it can change over a short time period in either direction. Statiscally, the expected range of returns should include your outcome 68% of the time. The expected range will include your result 95% of the time when you multiply standard deviation by two. According to, GLD has a standard deviation of 21.46. A popular mutual fund that owns gold miners as well as gold bullion and coins has a standard deviation of 44.70, as of Nov. month end. For perspective, the standard deviation of the S&P 500 is 19.77.

Back to my outlook for gold. My suggestion is to use the opportunity from this sudden weakness to build your exposure if you are not yet at the level you want. This may become a trend that takes gold lower still, but wherever the market takes it in the short run, the long term seems to be much higher. Scanner