Gold has set a new record. Though, you wouldn’t think so if you read today’s papers.
While the press did give us the obligatory write-ups of yesterday’s action – the price of the precious metal leapt to $1,043 – there is precious little in the way of useful, usable information.
There have never been so many well-paid columnists sitting on the fence. Why? It’s probably because they are scared of being wrong again. A lot of investors made a lot of premature calls on the bounceback last winter. That has led to the biggest casualty of the credit crunch…
Chutzpah.
The pundits have lost their collective backbone and are no longer doing their jobs. The people paid to set the agenda for the investing community – think the Lex column in the FT or Buttonwood in The Economist – are ducking the some of the biggest issues.
Years from now, 2009 will likely be remembered for big moves in the market. The year when fortunes were made, or rather, fortunes were recouped. Sadly, there is no conviction in 99% of the editorials you look to for guidance. Getting it wrong in 2008 has led to a serious crisis of confidence in the world of investing punditry.
It’s understandable, but in our business, it’s also cheating.
And this morning’s cop out on gold tops the lot. Not one of the major pundits is putting their necks on the line and calling it one way or the other. But, I’m going to break with this timid trend. I’m going to give it to you straight.
I could be wrong, but gold still looks good in the short term.
The story so far
On 2 September, I made the following recommendation:
“I view [now] as a trading opportunity rather than a reason to buy gold for the long term. If you already hold some, do nothing. If you don’t, get some. But make sure it’s easily tradable. Consider ETFs. You can do this by buying the ETF Securities PHGP ETF listed on the LSE.”
On 23 September, I followed up with this:
“We’re three weeks into this trade and it looks like it has further to go. If you’re looking for a way in, I present three simple ways that you too can play the gold trade: Buy physical gold, buy gold ETFs, buy gold mining shares.”
So, four weeks later and with a $75 move in our favour – substantially more if you bought a gold mining share instead of the physical commodity – we are at a crossroads. How much further does this historic rally have to go?
Well, you’ll remember that this rally is a technical event. We followed the traders into it and, if they’re true to their word, there is further to go. Step forward Barclays Capital, talking up a run to $1,500. Why? Allow me to translate their chart-speak:
Barclays: “Initial resistance is found in the 1050 area. That is way too conservative given the spring board that a wide 18-month range provides. We believe gold has significant upside potential into 2010 (channel resistance currently is at 1370; history suggests a run at 1500). In the coming weeks, we view consolidation above 1020 as extremely positive… Hold long positions.”
Translation: The rally could end at $1050 but probably won’t. The upward momentum built over the last year and a half means gold will keep on rising. The real barrier is at $1,370 and then $1,500. If the price stays above $1020 in the next fortnight, buy. If it doesn’t, sell.
This is sound advice. As I said last week, this is not a long-term recommendation. This short-term trade is working in our favour but already looks long in the tooth. I’m ready to sell if wind turns against gold and you should be ready too.
As the old adage goes, “no one ever went broke taking a profit.”
Things to watch out for
Here’s my concern, the rally in gold is as much a currency story as it is a gold story.
When you think about the fundamental drivers of gold – jewellery demand, inventories, inflation expectations, etc. – this recent rally doesn’t make much sense. Sure the demand is firmer than in 2008 and the long-term inflation argument is intact, none of that is new news. So the drivers were likely something else. That something is probably currency weakness.
You can see from the chart below the clear inverse relationship between the dollar (in black) and gold (in red). Whenever the value of the dollar has fallen this year, the price of gold has risen.
Dollar down, gold up – how long will it last? 
Source: Bloomberg
In fact, since 1996, a 1% move in the dollar has resulted in a -1.2% move in the gold price. Given this very strong relationship and the very fierce drop in the dollar recently, it’s fair to assume that gold’s rally is as much to do with the dollar as it is with its own fundamentals.
And if the dollar starts to recover, it might take some of our gains with it. My advice is to proceed with caution. We’re buyers for now but a shake below $1,020 could take us out of the trade. The next two weeks are the most important for this trade…
Best wishes,
Theo Casey
For The Right Side
Editor’s note: If you’re looking for specific gold stocks to own, then you might want to take a read of Dominic Frisby’s report. He’s found six shares he believes could double your money if gold takes off higher. Click here for details.
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