Why I’m desperate to place a huge bet on gold

I don’t like spreadbetting or contracts for difference (CFDs). I appreciate that you can make a lot of money if you get the call right. But I don’t have the temperament for them.

Once I make a bet on something, even if it’s a tiny position, I find it very hard to concentrate on anything else. I have to keep following the progress of the bet. I’m constantly checking my phone or logging into the spreadbetting website to see the latest prices, when I should be doing something more productive.

But this week I am very close to doing something I haven’t done in a long time.

And that’s placing a massive bet on gold…

Gold is nearing the end of its latest consolidation phase

Let me start by reminding you of my ongoing, big picture theory on gold.

I’ve been saying since September 2011 that gold is in a consolidation phase. That phase would last at least a year, I said, and we wouldn’t see new highs until autumn-winter 2012 at the earliest.

I base this theory on a repeating pattern that gold has followed since this bull market began around the turn of the century. Gold tends to make a move up, which might last several months. It then enters a phase of consolidation. The magnitude of this consolidation phase tends to reflect the previous move up.

This phase usually begins with a nasty correction – think September 2011, March 2008, May 2006. Gold then trades sideways with a slightly upward bias. It eventually re-tests the old high and – after a few attempts – goes through it.

Gold enjoyed a long and protracted move up which ended in blow-off fashion in September last year, when it peaked at $1,920 an ounce. You can get all academic about it, and argue that the move began in November 2008, in February 2010, or February 2011. But none of this changes the fact that the move was big. Therefore the consolidation would be big – at least a year, probably longer.

In the chart below, I point out the more obvious phases of consolidation since 2001.

Gold price since 2001

I’m of the mind now that the current period of consolidation is coming to a close. First, we have meandered for over a year – we’ve done our time. Second, gold is playing out according to its typical seasonal pattern. I said a few weeks back, when gold was at $1,750, that $1,700 wouldn’t hold, but that we would find support in the mid- to high-$1,600s.

That’s what has happened and, so far, support has held. These corrections always seem to happen in October. It is a bad month for gold. November, however, is a good month.

In this next chart, I show the seasonal patterns of gold based on its action over the last 30 years (thanks to Dimitri Speck of seasonalcharts.com).

 Gold price in the last 30 years

And here, I show gold’s action so far this year.

Gold price so farthis year

You can see how January, February and March are virtual replicas. April and May – normally good months for gold – were down months this year. But since the June correction, gold has mapped out the seasonal patterns – we had a strong July, August and September, and a horrid October. The set-up is for a strong November, typically one of the best months of the year for gold. Any such rally would likely have us flirting with the $1,800 mark again.

I also showed a few weeks back how gold – and particularly gold stocks – do very well in the year following an election in the US. Gold made a major low at just below $700, a week after Barack Obama was elected in November 2008. It hasn’t looked back since. The gain is about 240%.

Why gold bugs should be rooting for Obama

Obama has now won a second term. But I had noticed a lot of gold bugs cheering on Mitt Romney. I can’t understand why. Gold likes the Democrats.

The chart below was created by Jan Skoyles of the Real Asset Company. It shows the change in gold price during presidential terms since Richard Nixon’s time. The average is for a 358% gain under a Democrat president. I guess it’s all the deficit spending. A 358% move from here would take us over $6,000.

Here’s to Obama, that’s all I can say.

Change in gold price under US  presidents since Nixon

It gets better. The chart below shows the relative performance of gold during first presidential terms and second presidential terms since Ronald Reagan was in charge. The tendency is for gold to outperform during a second term. A 240% gain during Obama’s first term – what’s in store this time around?

Gold performs better in a aUS presiden't second term

The fundamentals for gold are strong, we all know that. The long-term consolidation pattern looks good. The seasonals are right. The election cycle is right. Finally, the technicals look good.

Gold price since 2008

On the chart above, the blue trend line (which I have drawn off the 2008 lows), looks like a strong line of support. In addition, the two moving averages I have drawn – the 144-day in green and the 252 (1 year) in yellow – should also be supportive. They have been in the past.

I have also circled gold’s recent lows in red. You can see there is a tendency for a “spike low” – which is just the kind of low we saw on Friday.

All in all it looks very bullish. Of course, that in itself might be a bad sign. Perhaps there are too many investors looking for a post-election rally. The COT report – which shows the commitments of traders on the futures exchanges – is not particularly bullish either.

But, even so, I think we’re getting ready for one of gold’s big moves. I’m hoping for new highs by next spring. You can see why I am so tempted to place a massive, leveraged bet. Somehow I need to find the will-power to ignore the lure of those flashing numbers.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • Vested interest

    You have far too much of a vested interest to take your comments seriously, £10,000 an ounce , you did n’t even have the decency to quote dollars !!

  • EMS

    I know exactly where you are coming from on the need to keep checking your bet. I and many others are the same. If I have a big bet usually on Gold I find myslef in the midle of the night wandering down the corridor to the toilet and then it hits me. Gold is still trading. I ignore it get into bed, but the impulse is too strong I have to go to my laptop and find out whats happening. It drives me round the bend.
    Thats why I have physical gold and SILVER! As well as miners stocks. Which I only review once per year.
    Thanks for sharing the psychological impact trading has on you. It is the one area that most people do not consider until they trade and it takes them totally by suprise.

  • Alan

    I’m a long-term gold believer, but in the next few months I can see it falling a lot as a huge dose of obama-based optimism hits the markets. To me this whole story is a huge sales pitch, especially the very weak charts like the one showing “change in gold price since Nixon, republican/democrat” – this chart will be skewed by the 79-80 golden ascent from 100 to 900 dollars.

    Invest in gold, yes, but not on the basis of this article.

  • Scott

    could someone explain why there is any real difference between spread-betting on gold, and buying a physical lump of it.

    If anything, isn’t spreadbetting easier and cheaper, for the same net financial result?

  • Ian

    A great article Dom i see exactly where you are coming from and was think the same thing myself. In order to place a trade where do you see a good sensible place to place a stop loss i’m guessing the 1650 area?

  • Eddie

    I would say that anyone with gold should hold it if they can afford to – the price will keep going up, simply because the economy is still in such a pickle, in the US and Europe – and Britain still have masses of bad debt tied up in houses, the price of which should fall by a third at least (if we didn’t have the BofE and the government artificially keeping down interest rates and buy to let buyers and foreign buyers, prices would have fallen to their right levels).

    I do no know anyone outside of message board land who wanted a Romney win. Don’t forget, Obama is the equivalent of our Conservatives really; the Republican right is off the scale in Europe, and even the fascist parties here are more left wing! I made a few hundred quid whilst sleeping last night because of Obama’s win and the gold price rise too!

    I can see gold rising in value for at least the next 3-5 years. $2000 an ounce easily, maybe 3 or more. There is nothing else to trust – not even property.

  • Orb

    Scott @4, if you are buying physical gold based on the price in US$, you need to follow the GBP/USD chart too to get the gain in £’s, as the change in US$’s needs to be converted into your gain/loss in £’s (your ‘bet’ (trade) is based on the £ value of gold).

    However, if you spreadbet gold based on the price in US$, it doesn’t matter what the GBP/USD is doing because you are placing a bet that the US$ price of gold will change – a big difference (your ‘bet’ (trade) is based on the US$ value of gold).

    I’ve held my spreadbet positions on gold in my FXCM account for months now, and the cost is CONSIDERABLY less than MoneyWeek’s recommended Shortspreads account. FXCM’s trading platform is CONSIDERABLY better than Shortspread’s platform too.

  • Orb

    EMS @2, dealing with the psychological challenges of trading should be part of the course: if you cannot overcome the hurdles, you should NOT be trading! If you refuse to acknowledge such weaknesses, chances are good you’ll become cannon fodder for ‘the big boys’ – they prey on the psychological weaknesses of amateurs – and you will simply become part of the 85%+ who lose.

    Start with sound money-management principles (stop-loss as a % of the total account) and demo-trade a sound strategy that wins overall (favourable risk-reward ratio); then move over to a real account when you’ve developed the confidence needed to sleep well at night.

  • HL

    All fiat currencies lose their purchasing power — sometimes slowly, sometimes quickly, but always their value goes down. Let us nor forget that the US Dollar has lost 97% of its value since 1913. A similar thing has happened to Sterling.

    So when Dominic suggests a price for gold, he is commenting on the future value of fiat currencies. Could an ounce gold be worth £10,000 one day ? Sure it could. Already it is worth four times its 1999 price. For a holder of Zimbabwe Dollars, it is worth trillions of times more.

    So the question for thinking people is not ‘could’ gold be worth £10,000 one day — but when is that figure is likely to be reached ?
    100 years from now ? 10 years from now ? Clearly, Dominic thinks sooner and he is entitled to his opinion.

  • Stephen B

    Short term gold price moves very difficult to predict.

    I’d say a better option is to buy gold miners, especially some well-run juniors, they are cheap so less downside and plenty of upside, as they still need to catch up with the gold price.

  • Malcolm

    The gold streaming companies- Sandstorm, Royal Gold and Franco-Nevada are a better alternative for a gold-bug to either the bullion ETFs or the miners .
    (Imho of course.)

  • JREwing

    Great call. I’ve been saying for a few months that a Romney Presidency would cause a minor crash in the gold price. Just look at the price action after he won the first debate. But now, he has lost and Obama has the licence to do as he pleases. There is a small matter of the Republicans controlling the House but all else is with the Democrats.

    I believe Obama is going to be much more radical in his second term as he has effectively been “vindicated”. So watch out for inflation, spending and taxes. We will meet again in four years to test the veracity of this prediction.

  • Kingbingo

    @Eddie“even the fascist parties here are more left wing!”

    Of course the fascist parties are more left wing you idiot, fascist parties ARE left wing. They are National Socialists, Just because they are also Nationalists does not make them any less Socialist.

  • Teresa

    I assume that, in all your projections, you’ve factored in that gold is a heavily manipulated market?

  • Dick Tracy

    This is a BAD call.

    From Elliot Wave point of view, after the latest big up move, the gold has corrected as follows: A down, B triangle (which has just been completed), and now gold is starting last corrective wave C down, which is going to drop BELOW previous lows. My current estimate for this drop is 1450 (remember, we haven’t seen much of this down move yet).

    So I’m keeping gold buys on hold for now.

  • dlp6666

    I think the ‘magic’ 144 and 252 moving averages are completely arbitrary – and haven’t offered solid support in any case.

  • Steve

    I have just consulted my tea leaves and they tell me not to buy yet.

  • Fasteddy

    Dont make the bet Dominic, like you ive ridden the gold rollercoaster for the last 10 plus years and like you iv profited from it. whenever iv tried to leveage up my positionor use financial instruments to increase my gains its all ended badly. Even trying to hop in and out of the gold bull hasnt worked for me. Iv come to the conclusion that im going to make a fortune as it is anyway so why take the risk of being out or being stopped out of a bet when you already know the endgame. Stick with the plan, get rich slowly!

  • Morry

    I HOPE your comment that gold bugs ought to root for Obama was tongue-in-cheek. That would be like hoping for your own death because you have a life insurance policy.

  • pjm

    Steve…..I’m a coffee man myself, so I don’t have tea leaves to look at……..where I live we’re expecting a bright moon tonight…….when it appears I’ll have a word with the “Man in the Moon”. I’ll let ye all know what he said as I have it on good authority that he knows more than most on the prospects for Gold !!!!!!!!!!!!!!!!!!!!

  • Gordon Freeman

    Whatever you do, you must consider the dollar. Short-term, the commercials are positioned for dollar-strength and gold-weakness (although we need to see if that changes now that the election is over). It’s not just about moving averages and technicals on charts. I suppose though even if we get a risk-off dollar rally from here (due to the fiscal cliff worries), eventually it should correct back down again due to the ongoing QE. But it’s the timing of it all which is the hardest thing to get right! Good luck in the casino :)

  • Boris MacDonut

    Excellent and well balanced as ever Dom. I particularly like your plea to not go all academic and just stick to charts that confuse coincidence with causation. Reading your articles is on a par with a visit to a seaside mystic, but at least we don’t have to cross your palm with silver.

  • Kojak

    I am not sure whether you are going to make a leveraged bet or that you are trying to resist making one! Have you a coin in your pocket?

  • Turbo

    @Scott – plenty of reasons to favour a lump of gold over spread-betting. Ownership of the physical stuff cuts out counterparty risk, you won’t get stopped out of your trade, your broker won’t go bust, your contract won’t expire, etc.

    If you believe that gold will continue its long term ascent for a few years yet, and you’re happy to hold over a correction (very easy to do), then a lump of gold is a surefire win over longer time frames. Spread-betting, not so much.

    Not that I don’t think it makes sense to place some leveraged bets on part of you allocation to gold.

  • Forecast For TOMORROW

    we all know that that chart with the trendline is problematic, because trendlines are made to be broken.

    However, we all know that inflation has already started to come in and there are no bulls left in the gold sentiment index. The last time that happend we really insanely way up higher than anyone or idiot pundits thought.

    I listen to the guy from FFT ” forecastfortomorrow dot com ” and he has been correct with his gold calls, and stockmarket calls. Very smart guy.

    The proof is in the pudding. I am looking at buying more physical gold too. Thanks for this post….awesome stuff.

  • dr ray

    “massive leveraged bet”
    That is the mentality of a gambler or a house buyer 5 years ago.

    Stick to investment advice (or stand up comedy) Dominic.

  • Freddy Mays

    “Gold performs better in a President’s second term”

    Oh come off it. This statement has been drawn off such a pitifully small sample size it’s embarrassing. You might as well be saying gold performs well in week’s where there are a high number of Premiership goals.

    Anyone who draws inferences from the fact at the top is a fool – pure and simple.

    And as for encouraging people into massive leveraged bets – you REALLY SHOULD BE MORE RESPONSIBLE.

  • Boris MacDonut

    #26 drray. We’ve had our spats in the past,but I have to say i totally agree with you.
    #27. Likewise. Dom is very good at explaining obscure coincidences and equally good at ignoring pointers that suggest otherwise. Gold fell in 1913 and 1813….next year is 2013…uh oh.

  • jack

    The only people that are playing with gold now are countries.

    The US hold 95% of Germanys gold, do you think they care where it came from? 6 million jews ring a bell?

    Germany now has its eye on greeces gold!

    Buts its not the people thats bad, its the greedy rich. Thats writtern all the way down in history!

    It’s a war alright but one that going hurt much more than 6 mill

  • aff

    Don’t leverage it just stack some away at regular intervals. And get real shiny physical gold bullion. Its the only financial assest that is no-one elses liability. Same cannot be said for shares in GLD or other ETFs. It looks pretty too and you can stroke and fondle it.

  • Boris MacDonut

    I can’t wait to see what Dom comes up with for next week’s attempt to push Gold. Since setpemebr he’s told us Gold is running out…Gold will hit $1,920 an ounce …..or £10,000….the annual fall of 6% is a seasonal correction and now he is desperate to make a huge (possibly poorly informed ) bet.
    I’m guessing he’ll have to go with Gold ,the cure for cancer.

  • Andy

    Cripes, you are right Boris! Anyone with savings should instead take your advice and leverage up with a mortgage to buy more property. That would be far safer, how could they possibly loose….

  • Boris MacDonut

    #32 Andy. That’s more like it. Just like Michael Winner did.

  • jack

    Borris, your right and so is
    Micheal to sell now, before property goes off the cliff along with gold!

  • dr ray

    Comparing gold vs property (or specifically London property) is a bit pointless because both are driven by the same fear of international government seizure of assets and inflation. I think both are reasonable way to protect at least a portion of ones wealth but if your idea of investment is to make massive leveraged bets you would be better off borrowing money from Wonga and buying National Lottery tickets. It might work out OK.

  • jack

    whos comparing gold and property?
    But one does affect the other and as soon as property prices hit a price that is seen as reasonable people will sell there gold and invest in property yet again.
    Then you will see gold prices plummet!

  • J Thomas

    My gold sovereign collection built up over thirty years has been my best investment ever. Thats because I’ve always viewed gold as an interesting hobby for the long term, and have never taken short term bets or been interested in paper gold shares.
    The only trouble is I’ve given many sovereigns away as gifts over the years, kind, generous soul that I am.