GOLD LOST $11 AN OUNCE THIS PAST WEEK TO CLOSE AT $1726 AS THE STOCK MARKET GAINS. IS GOLD BACK IN ITS TRADING RANGE?
Friday fEBRUARY 3, 2012 update: For a couple of days this week, gold was looking very strong -- with prices above $1750 an ounce and
it appeared that gold was going to make a run back to the $1800 level. But on Friday, when the Dow Industrials and the
stock market had a very strong day, the price of gold tumbled more than $30 an ounce. And that put gold back to near
the bottom of that trading range between $1700 and $1800 an ounce.
The price of
gold during the first four weeks of 2012 staged a modest recovery, closing up a total of $171 during the first four
weeks of the year. This past week, gold lost $11 an ounce, and that put gold at $1726. The
big increase in gold two weeks ago came when the Fed announced its intentions to keep interest rates low -- near the zero-percent
level, and low interest rates like that hurt the dollar and make gold prices higher. Some profit taking was inevitable,
and we had it this past week. Gold is now back into our moderate-term trading range of $1700 to $1800 an ounce.
But it does not necessarily signal an end to the price correction for gold after its record setting rally of 2011.
Gold
may look like it's in a rally mode, but it's not. Gold is merely bouncing around after getting hit hard and losing several
hundred dollars per ounce in its price correct. I think the correction will continue for sometime and gold might even
sell off to lower levels soon before the correction is complete. But, in the meantime, enjoy the gains while they come
-- just be cautious about them.
Helping the price of gold to rally over the past
several weeks were renewed concerns about the Euro financial problems and recent threats from Iran and worries about
its nuclear intentions.
While gold back above $1700 might be viewed as a positive
sign -- it is not enough of a rally to signal an end to this correction for gold prices. And, some of the big analysts
are now talking about gold dropping more during early 2012. Some are even suggesting that gold might test the next support
level of $1478 an ounce. Well, where have they been? Gold has now lost about $200 an ounce from its record set
earlier in 2011, and I've been saying that gold is likely to test $1300 an ounce. I guess that makes me more of a pessimist
than the big analysts. But then, I'm not selling gold -- and I'm not trying to get you to buy it either -- and that
might make me a bit more objective than the other guys doing the talking who do show up in the national media spotlight.
Many of them are, in fact, gold dealers or commodity traders.
The price of gold slipped $11 an ounce
this past week to $1726 an ounce. The big picture is still this: gold was once
above $1900 an ounce and the rally stalled out.
I still think that the stage for a retreat back
to the $1300 level and a test of that very important support level has been set.
An unusual thing
happened the other day: a gold dealer telemarketer called me asking if I wanted to buy some gold for a long term investment.
I don't do business with telemarketers from unknown firms so I said I wasn't interested. "But gold has been at
record highs," the telemarketer rushed to say. "I know that," I responded calmly, "I've been watching
gold prices for a long time." There was a pause and then the telemarketer asked, "then maybe you'd like to
sell?" That was unusual, indeed. It was the first time I ever had a telemarketer calling me asking if I wanted
to sell? I've been thinking about that call and it raises a lot of thoughts.
My first thought is
that the telemarketer was trying to stir up a conversation and keep me on the phone. The longer I'm on the phone
the closer the telemarketer would be to making a sale... or perhaps making a purchase? Let's face it, these companies
make a profit when they buy and when they sell. So perhaps this telemarketer spotted me as a potential seller
when I said I had been watching the market for a while and I was not interested in buying? Or perhaps the telemarketer's
company is looking to buy gold now knowing that it can make a profit on the spread between what they pay for the gold and
what they will sell it for?
Gold had been staying in the trading range of about $1700 on the low end
and under $1800 on the high end until its retreat seven weeks ago. We have to seriously consider the
significance of that drop of six weeks ago to under $1700 an ounce. It
could mean, for example, a new recession is coming which will ease inflation expectations and make holding gold harder to
do when investors are strapped for cash. It could also mean that continued worries about economic problems in Europe
will send more Euros into dollars, and as the dollar gains in value the price of gold (which is priced in dollars) will decline.
This sell-off
might have been triggered by fears of recession and recession usually kills inflation. Many investors look at gold as
an inflation hedge -- and not as a recession hedge.
Given
a choice between two evils, I would rather have inflation over recession. I would rather have everyone dealing with
higher prices, than have some people or many people without any income at all.
There is no sign
now that gold will resume its recent climb to break through $1800 an ounce, or that it will resume a rally to reach
new record highs. However, the long term bulls should be happy that for now, the price of gold has moved back above
$1700. Is it a time to take profits? Perhaps. But that is something that each individual investor will have
to decide on their own taking into consideration their own tax situation, investment objectives, and outlook for the markets.
No market commentator can responsibly say sell or say buy when selling and buying are personal decisions.
However,
with that said, there is still a need to be concerned that selling will hit the gold market again and that a retracement back
to $1300 could come in short order.
The bulls, of course, will look at the modest rally
of these past two weeks and reason that this "correction" or selloff is over and it's now a time to buy.
Well, remember that most bulls are actually gold dealers trying to sell, or investors hoping to sell at higher prices.
So let me remind you that despite the recent rally gold is now in a consolidation phase.
At
this point, it is impossible to predict how much lower gold prices will trade or if they will turn around and head higher.
An overhead resistance level of $1800 doesn't mean that the bull market for gold has ended. Gold would have to drop
back to about $1,030 an ounce for the bull market to be over. It's just that $1,800 an ounce is where there might be
more selling, should the price of gold reach that point again. In the meantime, gold could retrace back to $1300.
So
remember this: The price of gold could still retreat or retrace to $1300 an ounce and the long term bull market would
still be intact if that happens.
During the big selloff, gold and silver and platinum were
pounded as investors bailed out of the metals and put their money into U. S. dollars and government bonds for safety, mostly
because of the Euro crisis spurred by problems with Greece and Italy. And now we have some big swings in U.S.
stock prices which could impact gold-- either to the upside or downside-- it is not clear.
Gold is down about $200 an ounce from its record high
or more than 10-percent. In some analysts' books, that marks a correction
in the gold market but not an end to the bull market for gold. And I agree. But what few will agree on now is
a timeline for the recovery of gold prices -- and silver and platinum which are more linked to industrial demand.
Gold has been a safe haven, but with the stock market taking big swings and as worries
about the Euro crisis continue, the outlook for gold is not clear.
So
where is the money from gold going? Well, it's not going into real estate and it's probably not going into stocks --
it's going into cash and cash equivalents such as bonds which still return some, if a little, interest. And what does
this tell us? Well, it tells us that "Cash is King" and it also tells us that the "Golden Rule"
might no longer rule.
You remember the "Golden Rule" don't
you? It says that he who has the gold rules, but now it might be cash that rules. At least with cash you are getting
some return (interest) on those government bonds. And remember that gold is priced in dollars, and if the Euro falls
because of the problems in the European markets continue, the dollar could rise making the price of gold drop. And the
U. S. Dollar is still the best place for cash to be king. And now there is a lot of talk about the Euro losing value.
But
this doesn't mean that gold is dead. Gold is now back into the trading range of $1700 to $1800 an ounce. But keep
in mind that gold has had a tremendous run, and maybe the runners need to catch their breath. Every bull market needs
a pause to refresh, or a consolidation phase, and that's exactly what long term investors should be thinking about now.
The
previous surge in prices was a flight to gold as a safe haven, to protect against the uncertainty posed by a threatened
default by the United States government and other governments around the world. Gold came
back to life starting about five months ago. Rallies don't last forever, and neither do selloffs.
As I've been telling
you in previous reports, because we had such a strong rally, I did not rule out profit taking. $1700 an ounce was a key support level-- one that was even more important than $1800 an ounce.
And now, the record high price above $1,920 an ounce represents a spike.
Just
remember that when prices shoot up like a rocket, they can also fall back like a rocket does after it runs out of fuel.
But gold is still expensive, so the telemarketers are starting to push silver as an alternative.
There is a reason why silver is called "the poor man's gold" and the telemarketers are likely to be calling investors
pitching silver as being about to play "catch up" with the surge in gold prices.
2010 was a good year for gold,
still rising by about 9% and that beat the 6.6% growth in the Dow Jones Industrial Average. During 2010 the price of gold
had a
jump of almost 30-percent, and in 2010 gold was up almost triple what the Dow Industrials did.
Profit taking is normal
after a big run up so some more profit taking might come. However, this is not the time to start selling --
unless you have to sell -- and it may be the time to carefully invest in more gold. But remember I urge caution and
your investment in gold and silver should be limited to a small part of your assets.
We could still see gold hit $1900
again. What
is clear is that we are in a bull market-- but it is a nervous bull market that needed a rest.
Of course gold has
been in a bull market for almost half a decade and even when I was reporting the business news every day on KCAL-TV here in
Los Angeles more than four years ago (I left KCAL9 in October of 2006), I was saying on a daily basis that gold was in a bull
market.
It was months ago that I said gold price patterns back then reinforced my belief that gold was headed
for $1300 an ounce. The biggest reason was the reverse head and shoulders pattern on the charts, and then the very encouraging
cup and handle patterns -- all considered to be very bullish patterns. Of course the most bullish pattern of all was
that gold kept setting new highs. And $1300 was not the end of this bull run. But we might see a retracement to
the $1300 level again.
Let me repeat that: we might see
gold retrace to the $1300 price level again.
Now, what do you do?
Some will see the recent selloff as a buying opportunity. It might be, but I'm not suggesting
anyone pull the trigger just yet. Wait to see what happens. Wait for the selling to stop, for basebuilding to
follow and then for a new rally to begin.
But I still urge
caution. Limit your investments in gold and precious metals to perhaps 5% of your investment money. Remember that
gold can fall in price just as it could keep rising. Gold should be a part of your balanced investment portfolio and
that just makes good sense.
Also be careful what kind of gold you
buy. Some forms of gold are easier to sell than others so stick with those forms of gold that are easy to market such
as government coins. Avoid privately minted gold bars and coins unless it is a well known brand. Do not buy jewelry
as a gold investment because with jewelry you could be paying more for workmanship and marketing than for the gold content.
For those of
you who bought gold three and four, five or even six years ago at much lower levels -- when I was recommending the
purchase of gold on KCAL-TV in Los Angeles -- you are now enjoying some solid long term gains. It never hurts to take
profits. Remember, no one ever went broke selling at a profit. In my report
called "Stock Market Notes" which you will find in the index of this web site, I talk about an event called slumpflation which is when inflation
and recession happen simultaneously. Slumpflation is a rare event but gold could rally in a slumpflation event because
of the inflation factor. In a recession by itself, the precious metals including gold tend to lose value. But
in a slumpflation with strong inflation a gold rally could come as investors look for an inflation hedge. Gold could
very well be that inflation hedge during slumpflation. The big question is: will inflation return in the face of the
current financial crisis and the recessionary threat. So far, the threat is strictly from recession and not inflation.
