Why Buy Gold?
1987 to 2003: From bear to bull: the multi-year trends
The chart below clearly shows one thing: long-term trends often last many years. The bear market that started in 1988 ended in 1993. The up-swing that followed lasted from 1993 until 1996 and culminated in what may be called a false break-out. Then another bear-market unfolded taking the gold price down to $250 over a period of almost four years.
Then came the spike in the gold price as a consequence of the central banks' announcement that they would be limiting their gold-sales.
The 1999 bottom was tested again at the beginning of 2001. At that time, when few believed that any money should be put into precious metals, the present bull market started; a bull market we believe is still in its infancy.
While nobody can accurately foresee how long it will take to overcome the resistance zone around $400, by extrapolating the trend, we conclude that it may happen within the coming months and certainly sometime next year.
But let us first examine the shorter long-term-trend.
The long-term picture
When a market reaches a heavily overbought condition, as did the gold price at the beginning of this year, the end consequence is often an oversold condition. Both conditions, overbought and oversold, are exceptions to the trend, so we can disregard them when estimating the long-term tendency.
The conclusion is therefore relatively simple: while we had an exceptional favourable entry point at approximately $350, currently at about $378, we are approaching a slightly overbought condition. This can last for weeks before the situation begins to unravel, so it is during this phase that fast gains should be made.
At this junction, technical analysis is probably of little help, as external factors, which you find in no chart, can propel the gold price to much higher levels or bring it down again towards the $350 level.
Whatever happens short-term should only concern the short-term speculator, but not those who are convinced that we shall see much higher gold prices in a not too distant future.
You may recall that an investor is a person whose short-term speculation went wrong.
The medium-term picture
Back in February, the gold price briefly touched $388.90, a quick spike probably caused by some short covering.
We mentioned before that an overreaction to the up-side is often followed by an overreaction to the down-side.
This is what happened when the gold price fell to $320 by April.
The gold price approached the $380 level again in June, but was unable to push higher. An orderly correction followed which stopped at $340. A break through the resistance at $380 seems to be possible and likely during the coming weeks.
We see a short-pull back towards $360 as an unlikely possibility.
When you read what gold bulls write at present, you sense that they all expect the imminent break-out and this is a bit of a cause to worry. If this disturbs you, talk to a main-street banker and he will most likely tell you that gold is no place to be.
A UBS client in Zurich who recently wanted to buy their own gold fund was thoroughly discouraged by the bank's investment advisor to do so - a good omen.
The short-term picture
The first white arrow shows the jump of about $10 on August 27. The second arrow shows the one of September 5.
We may now have a bit of churning at this level. We may fall back to $370 or we may go right through to $400: who knows.
For our part, we think it wise to sit tight and see what will happen over the coming weeks.
Are US markets fundamentally cheap?
Historically, a FAIR valuation of US markets has indicated a dividend yield of 4% to 5%. Dividend yields at present, however, are still at less than 2%. Historically cheap US markets yield upwards of 6%. The answer to the above question is therefore simple: NO! As pessimism spreads, gold will rise, the dollar will fall, as will the major US indices.
The following recommendations were valid at the time of writing, viz. at
and may no longer be pertinent at the time of reading.
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Peter Zihlmann
September 10, 2003
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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