Fair Weather Gold Analysts
Dr. Clive Roffey
Have you noticed that when the gold price posts good gains all the gold orientated websites are awash with a constant procession of gold price forecasts, many of which run into several thousand dollars an ounce? Most of these superlative prognostications come from analysts who were conspicuous by their silence for the past three years as bullion and the shares forced their way into investment contention.
There is nothing like a strong gold price to bring all the fair weather analysts out of the woodwork. But when bullion or the shares have a retraction in value these commentators are suddenly absent from the analytical fray.
One can judge the over bought or oversold nature of bullion by the number of popular website postings on the gold price. A rising gold price enhances the psychological confidence for the average analyst to expound the latest theory, whilst a contracting market apparently diminishes the desire to be read. The greater the number of positive gold postings the more overbought becomes the gold market, conversely the more silent the chat pages the closer one is to a buying area.
Bullion's break above the critical $330 level prompted a sudden out pouring of extremely bullish analysis with upside forecasts ranging from a conservative $600 to an outlandish $35 000. But silence has reigned as more recently the gold price has struggled to break above the $372 resistance.
Perhaps the motivation for the desire to publish is the "I told you so" syndrome. Nothing sells newsletters more than the ability to advertise that ones analysis is correct. But how often and in what sort of market are the correct forecasts being made?
As fund managers and institutional analysts of the Dow and other global equity markets are finding out to their cost, any idiot can make correct bullish forecasts in a roaring 20 year bull market. But it takes outstanding analysis to go against the trend and warn of a bear market.
In this context there are some analysts indicating that the current run in the bullion price is merely a bear market rally. My criticism of such analysis has always been that people who study the gold price and ignore the movement of the shares are not even doing half a job. From 35 years of gold analytical experience I can tell you that the shares are far more important than the metal in reaching conclusions about the gold price. I would like to have these current bearish commentators explain to me how gold shares that have appreciated from 600 to 1000% in two years are in a bear market? Or for that matter how can gold still be in a bear market with that sort of performance?
I am not saying that the $3000/oz forecasts are wrong. Who knows, we are no where near to attaining those dizzy heights at this point of time? But my attitude is that it is difficult enough to analyse the current situation that I prefer a step by step approach. Let's worry about the near term prospects and face the longer term potential as it unfolds.
I have always been wary of analysts who tell the market what it must do. The market is the boss and the best we can hope for is to be able to follow its whims and interpret the signals. How many investors happily state that they want a five year investment? Effectively they are telling the market that it must appreciate for five years. Nobody invests to lose money! Their attitude is wrong.
In my course in technical analysis I ask investors to define long term investment. Five and ten years are the popular choices. My definition of long term investment is from the bottom to the top. Once the main uptrend is broken it signals a period of potential weakness. The uptrend on most global equity indexes failed at least two years ago. So I do not see the point of remaining invested. Conversely the uptrend in the bullion price is well and truly intact and looking strong for the near future. A similar situation in reverse applies to the downtrend on the dollar.
Some time ago I detailed and analysed the gold price in Swiss Francs chart and designated it as the most important chart in the book. I showed the potentially massive reverse head and shoulders pattern. Well it is just about to break above the major resistance at the SF500 neckline. This will trigger, not only a new bull market for gold priced in Swiss Francs but also the huge change of investment approach that I discussed in that article.
We are at a cross roads of investment attitudes. All the accepted investment parameters and theoretical portfolio management theories are about to be blown apart. Investment strategy has entered a new era, and it is not based upon portfolio diversification in the accepted sense. Investment choices will be drastically narrowed and selectivity will be the order of the day.
Previous advice has been to avoid putting all ones eggs in one basket. But what are the choices if there is only one golden egg and all the others are addled?
2 February 2002
Dr. Clive Roffey
Is a leading market strategist, specializing in South African gold shares.
chartist@mweb.co.za
www.utm.co.za
www.charts.co.za
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