Price of Gold – Is there a Correction Coming?

If one listens to many pundits, there is a fear that the price of gold has risen too far and too fast. Without resorting to charts, detailed technical analysis and indicators, from a common sense point of view, it is possible that the price of gold is due for a fall. Any time the price of anything shows a more or less continual rise for a long period of time, more and more people and investors jump on the bandwagon and the belief in that particular thing rising in value almost becomes a ‘universal truth’. These universal truths are always doomed. Witness the tech bubble in 1999 and 2000 when everyone recognized that our world was changing and this became a universal truth. Then, regardless of this universal truth, tech stocks cratered.
Gold has been rising in a more or less consistent pattern for over 10 years. In our last blog, we noted that if you had bought physical gold either 5 years ago, or 10 years ago, you would have theoretically achieved an annualized return of almost 18%. That is a long period of sustained growth. (Please read that blog for a more realistic view of the annualized return).
We are great believers in charts and technical indicators. To ignore them is to put yourself in substantial peril. Charts and technical analysis is an essential part of investing. But that is what they are – an “essential part”. We do not believe that our actions should be solely guided by technical analysis. Rather we believe that value investing requires the choice of value investments, and charts & technical indicators help provide the timing for investment in those value situations.
It is almost inevitable that when a consensus becomes almost universal, that thing will correct with a downward movement. Another way to look at it is in the words of a noted pundit who said “You never know if you are in a bubble until after the bubble has burst.”
In spite of all of these cautions, and more, we believe that gold has farther to rise, and we believe the same as the masses on this one. More important however, is that whether gold appreciates or moderates, good value stocks that do not depend on an increasing price of gold, will be a profitable place to invest.
Even Goldman Sachs now believes that gold has room to rise. Goldman has just negatively revised its 3 month oil forecast to $87 from $96, left natural gas unchanged, reduced their forecast for copper to $6,800 from $8,125, and zinc to $2,000 from $2,600 – all downward revisions. However, as far as gold is concerned, they take a different view. “We see upside risk to our forecast should investor demand continue to support further flows into the gold-ETFs or central banks continue to accumulate gold. For example, if gold-ETF buying were to continue at its current pace for the remainder of the year, we would expect gold prices to rise to $1,400/toz by the end of 2010.”
We add to their comments by noting the deficit issues in Europe and elsewhere, the Chinese factor and so on. Paper currencies are in a state of flux, especially with the demands on China that their currency be allowed to rise. Gold remains, as it has always been, a haven of safety in the midst of turmoil and doubt. We also point out that prices generally rise above their most recent price peak before they moderate, and if one compares the price of gold at its previous peak, on an inflation adjusted basis, the current price of gold still has a long way to rise.
Our position remains that one should buy the shares of gold producing and exploration companies, but only if the underlying companies represent good value, and only when the price points are attractive. Whether the price of gold rises or falls a bit, does not affect the value of the shares except due to market sentiment.