Thursday, December 29, 2011

Gold Is at a Critical Level

For those who have had a significant holding of gold bullion over the past decade, congratulations!  Since the central bank of England sold the bulk of its gold from 1999-2002 at roughly $250 an ounce (oops!), the price of gold has risen eightfold.  Despite recent weakness, the price of gold has risen for 11 straight years.  Over just the past five years, the price of gold has risen 134%.  How long can this go on?

While I take technical analysis with a grain of salt, the price of gold is now at a critical level.  Since the major low in the fall of 2008, the price of gold has held above the line drawn through the lows during this period, as well as holding at or near its 200-day moving average.  

The recent weakness in the price of gold, which has fallen from more than $1,900 an ounce to $1,560 now, has shaken the faith of many in the gold bull market.  Prominent technician Dennis Gartman, for example, declared the bull market in gold over and said the price could fall to as low as about $1,150-$1,200.  

Broad sentiment measures now reflect pessimism toward gold, which historically has led to large price gains for gold.  In addition, commercial participants in the gold market (the “smart money”) have recently been buyers, which historically has led to annualized returns of 26% over more than forty years.

Furthermore, gold historically has risen in price when real T-Bill yields are negative—that is, when T Bill yields minus inflation are less than zero.  Such an environment reflects monetary laxity as well as no opportunity cost (from interest-bearing instruments) from holding gold.  And real T-Bill yields are now well into negative territory.

Despite these bullish reasons and the conceptual merit in owning gold amid rampant "money printing" as governments seek to stimulate economic growth, I am wondering when the bull market in gold will end.  

The weight of the evidence supports holding or buying gold for the time being.  But after 11 straight years of higher gold prices that have culminated in an eightfold rise, be thinking about when to leave.  After all, gold prices fell for 20 years, from 1980-2000.

Steve Lehman

Gold:  $1,560

1 comment:

  1. Gold can also bull in 20 years so never lose hope. But if it won't, it definitely can't fell this year.

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