Why Buy Gold? Up-date N° 17
1987 to 2005:
From bear to bull: the multi-year trends and the long-term picture
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 deem is still in its infancy.
The gold price hit $ 455.20 in December 2004 at which level a consolidation set in which brought the gold price down to the lower trend-line, basically a healthy development.
The long-term picture shows that the precious metal bull-market is far from over and that the marked is preparing itself for the next major up-leg which we expect to start unfolding during the coming weeks.
The medium-term picture
When a market reaches a heavily overbought condition, the end consequence is often a heavily oversold condition. Both conditions, overbought and oversold, are deviations from the trend itself, which then form the boundaries of the channel within which prices fluctuate.
"At the beginning of December, the gold price reached again the upper trend-line for which reason a slight correction had to be expected. Where it will stop is not possible to tell except that when using the past as a guide to the future, we could imagine a "worst-case scenario" of a low of $ 390.", we wrote in December of last year and in fact the correction stopped at $ 410.
Should the $ 390 to $ 410 area be tested once more during coming weeks, we would rather consider it a buying opportunity than a cause for despair.
At this junction, it can be helpful to see how gold fared in relation to unhedged gold stocks. It is in fact quite interesting to note that gold made a new high in December but gold shares were not able to supersede the January high of 2004. The reason for this is easy to see: gold shares moved up much stronger than gold from March to December of last year. Consequently, when the correction set in, gold shares also sold off more heavily.
We remain confident that we are at the threshold of the next major movement to the up-side even though another test of the up-trend line could unfold, like the one we went through in the summer of last year.
The short-term picture
The short-term picture does in fact look promising as the short-term trend has resumed the up-trend right within the up-trend channel. If gold keeps holding at present levels, gold shares will likely continue to move higher and eventually take out the old high.
The US-Dollar
The US-Dollar has been in a down-trend since the start of 2002 as above chart shows. We often hear the argument that gold has only gone up in dollar-terms. The fact is that while the US-Dollar-Index has fallen 33% from 120 to 81 points, gold increased 76% from $ 250 to $ 441 during the same period.
As we expect the US-Dollar to fall further, an investor is well advised to hedge his dollar-investments. THE TIMELESS PRECIOUS METAL FUND, which we manage, is 100% hedged in favour of the EURO. (www.timeless-gold.com).
Following the performance table of the last six months of leading European precious metals funds in EUR (source: www.fondsweb.at).
The following recommendations were valid at the time of writing, viz. at
and may no longer be pertinent at the time of reading.
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
March 21, 2005
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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