The price of gold has shot up by 25% in the last few weeks. So while it's easy to argue for profit taking, Dominic Frisby isn't so sure. There may be many reasons to sell gold, he says, but we still have a long way to go before this bull run is over.
Gold this morning is at $1,890 an ounce. It began July at $1,480. That's a move of over $400, or nearly 28%, in barely seven weeks. A number of wiser heads than mine observe that that's a parabolic move and that parabolic moves barely end well.
Is 25% in two months really 'parabolic'? Maybe. However you define parabolic, there is a very strong argument to at least take some profit after a move like this.
But what would you do with the money? And what about the risk of missing out on further gains?
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When I first bought gold, I deliberately bought some physical gold and stashed it in a remote location for the simple reason that it would be a pain in the backside to sell. If I want to sell, I've got to go to said remote location, dig it up, cart it to a bullion dealer, negotiate a price and so on. Selling would not be a decision lightly taken. This was a deliberate step to remove any temptation to trade. I would only sell after a lot of consideration when I thought the big move was ending.
Exchange traded funds (ETFs), spreadbets and even the online bullion banks, where you can buy or sell at the click of a mouse, make trading too easy. It would be easy to think 'we've had a good run, I'm going to take profits, wait for a pullback and then get back in'. Meanwhile, the financial system collapses, gold goes to $10,000 an ounce and you've lost your position.
The more trades you make, the more mistakes you're likely to make. Goodness knows, I've made enough.
Yes, gold has gone ballistic; yes, it's getting too much media coverage; yes, it's trading at the top of its range; yes, it could easily pull back to $1,400 and there would be no technical damage to the long-term chart. But the risk is that if you sell, you then fail to get back in. You lose your position.
One of my closest trader friends, whom I hold in highest regard a doctor, a Yale graduate and a member of MENSA bought into gold at $250 an ounce at the very beginning of this bull market. He saw the light long before I did. He bought what are now billion dollar mining companies almost for pennies. He made a fortune between 2001 and 2007. But since 2009 he's been overly bearish and missed the whole rally. He failed to get back in. I'm sure there are many more like him.
Gold still has a long way to go
I can draw a million and one charts showing why you should sell gold now. But the fact is we still have a long way to go before we reach the end game. Heaven knows, The Times, who mysteriously have been steadfastly, resolutely silent on gold for several years now, despite numerous offers from me, finally mentioned gold in their Saturday editorial. They declared that 'demand for gold depends on factors such as dentistry' and that Gordon Brown 'was right to get out of gold'.
The mind boggles. While such breathtaking, eye-popping ignorance remains in the mainstream, you know that gold still has much further to go. These are all people yet to come into the market. In fact, I might add a positive article in The Times to my list of long-term end-game targets up there with the British government buying.
House prices still have further to fall relative to gold. Stock markets have further to fall relative to gold. We still have negative real rates. Governments are still spending money they don't have, then debasing their currencies to cover the deficit. The financial system is coming under a force of pressure it will not be able to withstand. I can go on, but you know by now what the drivers are and I don't want to end up in Rantsville.
If you must trade, there's a strong case to be made for selling gold and buying silver here, as the latter has lagged. There's even more of a case to be made for selling gold and buying gold equities, which have also underperformed. In fact, this week gold equities of all kinds actually held up quite well while stock markets resumed their assault on hell. That makes me rather bullish.
But the short of it is this. Be right and sit tight. Stay on the train maybe rollercoaster is a better metaphor and enjoy the ride. The bull will try and shake you off in all sorts of different ways. Don't let him.
Just look at the long-term gold charts
I'd like to show you next a couple of charts. The first is a log chart of gold since 2001. I have drawn a channel which shows gold's trading range through the bull market. We are trading at the top of the range, which makes a correction likely, healthy even.
We could easily fall to $1,400 or $1,500 and there would be no damage done to the trend. So there's a case to take some profit (a case I would ignore by the way, if you haven't yet got the thrust of today's argument).
Next let's consider a linear chart of the same ascent.
For the first five years of its bull market gold traded in a clear upward channel, as denoted by the blue tramlines. At the end of 2005 it broke above that channel and the bull market accelerated. The upper line of that blue channel then acted as support during gold's corrections in the following years.
Since 2006 another clear channel emerged, as defined by the black tramlines, a slightly more vertical channel. After five years gold has now broken out above that channel. Perhaps we are now entering a third accelerating phase of this bull market and we'll enjoy an even more vertical channel for the next five years. And perhaps the upper black line of the 2006-2011 channel will mark support for future corrections. That would be nice. In that case we have support above $1,600.
Cynics may scoff at this absurdly bullish scenario. Let them. I don't say this will happen. I say it's possible.
I'm just a bod from south west London. What do I know? But take a look back at this bull market and it's the cynics, the scoffers and the bears who have been consistently wrong.
In 2001 Professor Niall Ferguson, who went on to write and produce an entire TV series on the history of money, said: "Gold has a future, of course, but mainly as jewellery".
'The man who predicted the financial crisis', Nouriel Roubini, in October 2009 said: "All the gold bugs who say gold is going to go to $1,500, $2,000, they're just speaking nonsense".
All I can say is "LOL". (Or, for those of you unfamiliar with text messaging abbreviations, 'laugh out loud'.)
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