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.
Gold closed the week ending December 5 well above $ 400 and has thus established a new seven year recovery high.
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 a heavily oversold condition. Both conditions, overbought and oversold, are exceptions to the trend, so we can disregard them when estimating the long-term tendency.
Looking at the long-term trend which started in March 2001, we of course notice that the gold price has exceeded the upper-trend line once again as it did in March of this year. For this reason, we could conclude that the market is overbought and that we should expect a correction down to the level of $ 360.
On the other hand, we have broken above resistance levels and we could also argue that a new up-trend is forming which could lead the gold price initially towards the $ 500 level.
It is our opinion, the risk to miss the next price surge in the gold price is bigger than the risk of having to go through a prolonged correction which would be temporary in any case.
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.
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", we wrote on September 10 and indeed we did not have to wait for too long.
While the gold price is maintaining itself above the level of $ 400, the chances for further price increases augment also.
The short-term picture
The short-term picture simply looks extremely encouraging. The gold price has worked itself diligently higher during the past weeks, breaching the $ 400 level without too much trouble.
We expect this trend to continue in coming weeks, hoping at the same time that the movement will unfold in an orderly fashion and not too fast.
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 EUR against USD has just reached a new high, approaching the level last seen in 1998.
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
www.pzim.com
investment@pzim.com
forex@pzim.com
December 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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