A short technical and fundamental analysis of the Gold Price today…
IT IS ALWAYS too easy to ask “Can I buy at the bottom and sell at the top?” notes Julian Phillips of the Gold Forecaster.
But life doesn’t let too many of us achieve such perfection. Some investors believe that once you have the technical picture giving the top and the bottom that will do the trick, but – alas – many technical analysts will come up with different prices for tops and bottoms in any market.
So how does a professional approach the question? He looks from all sides, but particularly studies the fundamentals, which dominate the future price direction. Then he uses the technical picture to refine entry and exit points, which is what my colleague Peter Spina does on the technical pictures below, created for subscribers to our newsletter Gold Forecaster.
Resistance and support levels guide us on when to buy or sell, but it is always unwise to believe that a particular point will be absolutely right. The price will get very close to a particular point, but almost invariably it either over or undershoots it. And a professional will be happy if, on a long-term investment, he gets within 5% of the bottom price and the top price. He is following the tide and current of the market for the long haul.
Traders and day-traders, in contrast, chase the waves – and so ignore all but the daily picture. Of the best traders, some 52% of their trades will make money, and their real payment comes in the sandpapering of their nerves. Professional traderss are often ‘burned out’ by the time they are 40-45 years old.
So let’s look instead at a tried-and-tested way of picking the entry point, then the policy to adopt between there and your exit. Today, a look at gold shows that after two attempts to surmount and hold the $1,000 level, the Gold Price pulled back to $870 and is now trying to regain its position above $930 an ounce.
The first question a professional investor must ask himself is: “What are the prospects of the Gold Price falling from here?” A look at the action over the last year shows that gold has held support above $850-870. Some hope it will still pull below $850 to the lower $800s, but we feel that support at between $850 and $870 has shown enough strength to support any downward attack.
That is the technical picture too, one of strong support.
We now turn to the fundamentals to see what evidence there is to show the way forward. And it turns out that the reason for the failure to reach $1,000 and hold it is that the market needed time to get used to the concept of $1,000 gold.
Long-term investors were happy to take positions all the way up to that price level, and much of the way down too. Right now they are watching the macro-economic scene to see if other investors and the fundamentals agree with them. After all, if they find that they are alone in this view and other facets of the gold market disagree with them, then they will have to sell on a falling Gold Price, a very unpleasant experience. But they’re not selling their holdings, and waiting instead for the market to join them and for a trigger to take them higher in their Gold Buying.
Another key factor, however, is the Indian market, a market that won’t buy if consumers believe that the price will fall back after they have bought. They like to know that a ‘floor price’ is established and then they want to buy on that. Well the jump from under Rs.10,000 for 10 grams of gold to Rs.15,000 was just too much for that market to swallow and produced high levels of sales of ‘scrap’ gold making India self-sufficient in gold until now in 2009.
These stocks are soon to dry up, we believe, as the Gold Price holds and the prospect of even higher prices comes onto the horizon. We believe that Indian imports will continue fairly slowly ‘on-the-dips’ before the typical Gold Buying season starts at the end of August, then will come in heavily provided the prices are still below $1,000 to $1,100.
We also believe that global jewelry demand will recover to some extent, and for the same reasons the Indian market will. Central bank gold sales are meanwhile swinging over to the buy side, with half the amount sold by European reserves being bought by other central banks, either direct from their own miners or dipping into the market to do so. The Western-bank selling is also slowing, and non-Western buying is growing and may well strongly overtake any selling remaining.
As the global economy starts to splutter into life we also expect industrial demand to pick up. So all in all demand looks set to recover.
On the other side of the equation, supplies don’t look good at all. Miners, facing problems in the mines, with costs and labor, are set to produce a shrinking amount of gold each year for the foreseeable future. As scrap dies away again, so a big source of supply in the last six months will fade away leaving stockists of gold with very low inventories. Central bank supply is losing its significance too. Combine these factors and you can see that it does not take a large increase in demand to swing the supply / demand formula over to a heavy bias on the demand side. Only much higher Gold Prices will chase demand away as it did last year.
Should investment demand return with even a mild force, the Gold Price may run upwards to new record levels, we believe.