Why Buy Gold?
Up-date N° 18/June 6, 2005
1987 to 2005: From bear to bull: the multi-year trends and the long-term picture
The chart above 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, bringing 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 market 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 state. Both conditions, overbought and oversold, are deviations from the major trend itself, which then form the boundaries of the channel within which prices fluctuate.
"At the beginning of December, the gold price again reached the upper trend-line, so a slight correction had to be expected. It's impossible to say where it will actually end, but if history is any guide, we can 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. We also said: "Should the $ 390 to $ 410 area be tested once more during coming weeks, it should be seen as an excellent opportunity for purchasing, rather than a cause for despair. "
From the above analysis, it is easy to see that there have been many buying opportunities since this bull market started in 2001, along with some excellent prospects for selling. It also shows that at present, we are being offered a choice option for buying.
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 more strongly than did gold from March to December 2003. 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.
The short-term picture
Technical short-term indicators signal a massive over-sold situation. If the past offers a clue as to what this means, we may be in for an upwards movement which few expect at this stage.
The US-Dollar
The US dollar against a basket of various currencies is extremely overbought at present, therefore a correction is a rational expectation at least.
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 has increased 76% from $ 250 to $ 441 during the same period.
As we expect the US-Dollar to fall further over an extended period, 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).
The following recommendations were valid at the time of writing, viz. at
and may no longer be pertinent at the time of reading.
If you wish to receive our Follow-ups on the gold and silver producers and explorers we recommend, simply register at www.pzim.com or send us an email to investment@pzim.com
For more details on the services we offer, go to www.pzim.com .
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
June 6, 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.
Email this Article to a Friend 
Printer Friendly Version
