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Market Report: Gold Hitting New High’s but How Long Will this Metal Shine in Your Portfolio?

August 23rd, 2011 No comments

08.23.2011

Gold coated C63 AMG Mercedes in Dubai at the Mall of the Emirates. Photo courtesy: Syed Aouf / funtim.com

Market Report: Gold Hitting New High’s but How Long Will this Metal Shine in Your Portfolio?

Investor Education Series: Volume II. Issue IV.
Original article written by Net Advisor

Gold hit a new record high in early 08-23-2011 trading to $1,910 an ounce. We continue to believe that if the CME increases margin requirements sharply higher, the gold trade could be hit harder in the short-run. However based on the recent trading on gold there is another concern: A Parabolic chart.

Gold Prices using inflation adjusted U.S. Dollars from 1914-2010. Click chart to enlarge to 700x478. Chart courtesy Kitco.com

Gold has made an amazing climb and for good reasons:

Despite all this less-than-positive news, Gold may be due to a major pull-back at anytime. The question is when? If one takes a look at the chart above, Gold hit $850 an oz. in January 1980 based on high inflation related to strong oil prices, the Soviet invasion into Afghanistan and the Iranian Revolution.

Keep in mind that in 1980 oil prices “soared” to $35 barrel. Instead of the Soviets in Afghanistan (1978-1992), the U.S. is now in Afghanistan (2002 to date), albeit for different reasons. But we predict that the outcome will be the same for the U.S. as it was for the then Soviets. And as for the Iranian Revolution, that is also ongoing with a twist.

We have seen protests and uprisings all over the Middle-East and North Africa. So over the last 33 years not much has changed except for the players in the battle, perhaps location, and the costs have escalated.

Gold Chart August 2011. Bar graphs hitting top dotted line suggest a near-term double top. If this is true, the next move for gold could be sharply lower. If this is not true, gold could move much higher but eventually will have its big reversal. Click chart to enlarge to 762x381. Chart courtesy: Chart courtesy InflationData.com

Gold’s Shine & Tarnish
Gold in the short run looks a little toppy as the chart below suggests:

Light Sweet Crude Oil (2007-2008). Click on chart to view full size 729x350. Chart courtesy: GoldPrice.org

Yes, the move in gold is justified based on the above (bullet point) economic and global issues over the last 9 years, and may go higher in price. Gold could hit an inflation adjusted high of $2,251 an ounce based on 06-24-2010 inflation data.

Despite gold’s run, keep in mind those who recall the .com stock-market boom (1995-2000) that trend also collapsed. There were near countless number of parabolic charts from 1999-2000.

Yahoo (NASDAQ: YHOO) hit $108.17 on or about 12-27-1999 after going parabolic (CHART). The stock has since collapsed losing about -88% since its 1999’s high.

VeriSign (NASDAQ: VRSN) hit $248.50 on or about 02-28-2000 after going parabolic (CHART). The stock has since collapsed losing about -88% since its 1999’s high.

CMGI (no longer trading) – one of the hot late 1990’s .com firms holding over 70 Internet companies went public in 1994 at $8.00 per share. By January 2000, CMGI saw its stock soar to $160 a share, then crashed during the .com Bust to under $2.00 a share by September 2001. One could perhaps picture a gradual climb of CMGI from $8 then a parabolic spike to $160, then watching the reverse happen with a plunge to under $2.00

For the record, we are not saying that Gold is going to $2.00 or will be a product of the .com Bust. What we are saying is that gold is moving in a parabolic pattern, and all – not some, but ALL parabolic chart patterns eventually crash. Let’s take a look at another recent memory with oil prices.

Oil Prices surged then collapsed during July of 2008 to December 2008.

Original chart courtesy: TradingCharts.com Chart edit & description by NetAdvisor.org

Chart above: Oil prices peaked at about $147 barrel in July 2008, then plunged nearly 75% to $36 barrel in December 2008.

Gold: Not Exactly a “Safe Haven”
Gold may be a longer term hedge for the global problems that seem to be ever increasing, however one should know that gold is NOT a “safe haven” investment that is frequently been portrayed by some in the media.

As a former licensed (Series 24) branch manager/compliance officer in the securities industry and available as an Expert Witness, I would argue that the term “safe” implies “principle security and low risk.” This could not be any further from the truth.

Gold has a history of wild price swings. In 1971 gold was $35 oz. when President Nixon took the U.S. Dollar off the gold standard. Gold soared to $850 oz. in January 1980 on the Soviet invasion of Afghanistan and the Iranian Revolution etc., as discussed earlier. Gold also fell over -50% two-years later by 1982. From it’s 1980 high, gold slowly plunged -67% by January 2002. Gold is up about 584% from January 2002 to date of this article.

If anyone still thinks that an underline investment that can move with such volatility is a “safe haven,” that is a losing argument in any court or in front of an arbitration panel.

Gold is part of an asset class, a precious metal that is being used an an alternative currency in times of crisis.

Gold history of major events from 1971 to April 20, 2011. Click on chart to view full size 710x508. Chart courtesy: Reuters

What’s Next?: Stay Alert!
As for the near term, gold could continue to shine, however I think what investors will find at some point is that gold is not an exempt asset class from major corrections.

If severe economic conditions come to roost such as EU sovereign debt defaults, major bank defaults and related collateral contagion, devaluing of especially U.S. currency to pay for more deficit spending, and any or all these events are possible, then yes, gold could soar “beyond reason.” But any hint of stability in these areas, even if temporary, gold could fall rapidly.

For the newer investors in gold (past 0-3 years) who think that they can just sell their gold quickly and easily if signs of trouble for the precious metal comes up, that might prove easier said than done. Odds are that the move in gold (like other commodities) can happen when you’re sleeping – thus overnight. If there is a rush to exit, rest assured that there are big institutional traders who work in 24-hr shifts to buy and sell. They could get out of gold and the precious metal could see a plunge before you wake up.

If you are using a stop order and think that the investment will sell at the stop price, guess again. First, be prepared to be stopped out. The problem here is that there are a ton of stop orders in the market at any given time and a gap down move in this case gold, will trigger all those stops into mass market sell orders. In all likelihood, this tends to accelerate a rapid decline. Keep in mind that when you are selling something in the public markets (such as stocks, bonds, funds, commodities, etc.) someone else is buying from you; and who wants to buy something that is rapidly plunging in price, right?

After a major correction, we would probably get back into gold if conditions warrant.

Read more about why Net Advisor™ does not like “Stop Orders” in:
Anatomy of a Stock Market Sell Off

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Disclosure: Net Advisor™ and or clients may be holding long and or short positions in gold all via options that were also discussed in this report.

Credits:
Charts courtesy by respective owners where noted.
Original Content Copyright © 2011 Net Advisor™ All Rights Reserved.

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Categories: Vol 2 - Issue 4