Gold – The Great Gamble
In two recent blogs, we warned readers that buying gold at this point in time was a large gamble, and was against the instincts that investors should have. In each case, we speculated that weakness in the price of gold was probable, although not definite.
In the current world wide weakness of almost all markets, gold has proven to be not immune from falling in price. Gold on a chart is now at the double bottom from September and October 2011. If gold breaks through this support level, it could fall much further.
Chartists
Some chartists may interpret the current chart as ‘wedging’. Essentially, in an upward trend, a series of up and downs in a narrowing pattern foretells a further dramatic movement in the long term trend. Gold’s long term trend is up. Could be! But what a monster risk to take, as the current down trend could just as easily break through support to the downside.
It’s a gambler’s heaven. Bet your investments on a 50/50 gamble. We don’t know which scenario will play out, and nor does anyone else.
Central banks buy gold
As gold moves counter to what gold bugs prophecize, the world’s central banks are loading up on gold as they diversify their holdings. This is one of the great irony’s of this market. As people reduce their gold holdings, banks increase their gold holdings.
A report released recently by the World Gold Council showed central banks acquiring almost 150 tonnes in the third quarter, marking the heftiest purchases in decades.
“In fact, net buying accelerated notably during the quarter – totalled 148.4 tonnes – as the issues surrounding the creditworthiness of western governments’ debt seeped into the official sector. A number of banks continued their well-publicized programs of buying, while a slew of new entrants emerged wishing to bolster their gold holdings in order to diversify their reserves. We see this trend continuing into 2012.”
While the World Gold Council doesn’t name the central banks that are buying, they are largely in emerging market countries whose reserves are climbing. So far this year, said Marcus Grubb, the managing director of investment at the World Gold Council, central banks have acquired almost 350 tonnes, a record, and could take up to 450 tonnes before the year is out.
“This would compare to a net 76 tonnes in 2010, and net selling the year before,” he said. “We expect central banks to continue diversifying their reserves and rebalancing towards a target weight in gold, with demand likely to be driven by central banks in countries with trade surpluses, primarily in Asia, central Asia and Latin America.”
China’s September gold purchases leap sixfold
The regulations passed by the Chinese authorities to encourage gold trading over the past year appear to be working. Gold purchases in China via Hong Kong hit a record 56.9 tonnes in the month of September, registering a six fold increase year on year.
Data from the Hong Kong government showed that the Chinese mainland imported about 140 tonnes of gold via Hong Kong in the July to September quarter, more than the roughly 120 tonnes for the whole of 2010.
Cheng Bing Hai, president of the Shanghai Gold and Jewellery Trade Association, has also been quoted by newswires as saying that total jewellery sales by the top three jewellers in Shanghai have already exceeded 100 tonnes so far this year.
What to Expect
If you listen to Eric Sprott, he recently suggested that every producer of silver should stockpile 20% of their production. Mr Sprott is widely respected as knowledgeable in the field of precious metals, as well as market investing.
He is frustrated that the price of silver is not escalating as he feels it should, and he wants to show the world that the prices should be higher.
What is Certain
The market is the market. No one can accurately predict when something will rise or fall in value. What is certain, is the value of precious metals is not rising at this time. We think it is because of market instability and the need of investors to cover margin or other debt, as well as fear, that is prompting the selling.
Restraint, not gambling, is in our opinion – the way to react.
We may or may not have positions in the securities we name. In making an investment decision numerous factors must be considered including portfolio balancing, timing, cash and capital reserves, asset allocation and other factors. Readers are strongly advised to do their own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.
Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.
