Is now a good time to buy into gold?
The gold price has broken through the $800 mark and is hitting fresh multi-year highs on almost a daily basis. But could the metal be set for a hefty correction? Dominic Frisby looks at one of the key gold price indicators - and picks a cheap gold mining stock to keep an eye on.
MoneyWeek subscribers will already have seen some of Dominic Frisby's work - he wrote this week's cover story on gold and silver mining juniors (if you missed it, you can read it here: Get out of money - and into things).
As you may have guessed, commodities are Dominic's special area of interest. He'll be writing for Money Morning every week with his comments on the precious metals markets, and whatever else catches his eye. With gold and oil threatening new highs on an almost daily basis, I'm sure that you'll be very interested to hear what he has to say.
If you have any questions or comments for Dominic, just email me at the usual address - johns@moneyweek.com.
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Now that's enough from me for today - take it away, Dominic
"Peak Gold Ltd. has entered into an engagement letter with a syndicate of underwriters to sell special warrants of Peak Gold at a price of 75 cents per special warrant to raise gross proceeds of approximately $225 million or such other amount to be mutually agreed upon between Peak Gold and the underwriters."
Not surprisingly the stock sold off immediately and fell a good ten percent. One of my learned investor friends sold his position straight away. Another said, rather wittily I thought: Are they trying to out-inflate Bernanke?' This looks like it will mean a lot of dilution for shareholders.
The track record of the management of this company means you have to give them the benefit of the doubt, though at first glance, this move does not look like it has shareholders' best interests at heart. I am going to try and get a better explanation from the company, but I daresay they're raising the money to buy something. They need the cash before they can announce any deal and you have to trust those involved that the deal is a good one, in which case the share price will take care of itself.
I would suggest if you can get in below 60c, do so. If you own it already I would recommend holding. From a technical point of view it looks like it may even go down and re-test the August lows at .45c - no guarantee of that of course, most likely not but if it does, you know what to do. Buy, buy, buy.
Another of my tips, Kefi (KEFI), spiked up more than 25% on Friday's recommendation - that gives you an idea of how illiquid Aim is. The spreads on this stock that the Aim market makers have in place are verging on the criminal. Don't chase it up. I have a great deal of belief in the management of this company, but they are done no favours by the market makers on Aim.
Why the gold price could be due a correction
Now, what about gold itself? Unquestionably, you must own gold for the long-term governments are continuing to inflate the money supply, and combined with the rocketing oil price, a return to the dark days of the 1970s is by no means out of the question.
But is now a good time to buy gold? As you probably know, the gold price broke through $800 late last week. I would not be rushing into any new positions here, but just sensibly pound-cost averaging into the market, if you don't already have a position. We are in credit crunch territory again and, in the event of margin calls (where hedge funds and the like may be forced to sell liquid assets to offset losses on illiquid holdings), gold may sell off with everything else, just as it did last in August.
But it may also leave this sceptr'd isle for the heavens, who knows? After all, gold got through October without the usual October correction. Moreover, it survived the correction in the stock markets. There seems to be phenomenal buying strength at even the slightest pullback. Everything seems in gold's favour - except one thing. And that's the Commitment Of Traders (COT) report.
This report outlines the positions that the commercial traders in the futures pits (the blokes in the film Trading Places, basically) have taken. They are seen as the smart money, as they usually prove right, while the large speculators are seen as the dumb money. The blue line represents the position of the smart money, the green line, the dumb money.
These traders are always short, as they are supposedly hedging gold for mining companies. The question to ask is, How short are they?' Two weeks ago they were at record short levels, while the large speculators were the longest they've ever been. This was a recipe for the mother of all corrections. But that correction never came. Last week the shorts actually covered some of their positions. They must have been feeling some intense pain given the recent movement in gold and the size of the long position. But this week they re-shorted. The COT report, a fairly reliable short-term indicator, remains very bearish.
On the other hand, gold commentators Bill Murphy and James Turk, who believe some of these commercial traders are illegally suppressing the gold price, have long said that sooner or later the a huge short squeeze is going to come into play and force traders to cover their positions, sending the gold price through the ceiling. This could be what we are seeing now but as I said above, average in, just in case a correction comes.
I am going to tip just one company this week, in addition to those mentioned in the current issue of MoneyWeek. (I am MC-ing The Silver Summit in London and will be meeting with lots of companies there. I will report back next week with some silver recommendations, as well as an overview of the event).
That company is Olympus Pacific, an emerging gold producer-explorer in Vietnam and The Philippines. The company has good assets, it's producing, it has exploration upside, a great boss in Colin Patterson (who I have met and liked enormously), but best of all, it's looking cheap. A buy below C$.50 (CA:OYM).
Oh, and one more thing: uranium companies look like they're starting to move again. More on that next week.
Until then, I'd just like to leave you with a quote I rather like:
Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold.' Tolstoy
Turning to the wider markets
London's FTSE 100 index closed just 13 points higher, at 6,474, having given up earlier gains as credit concerns resurfaced. However, it was a good day for miners including BHP Billiton and Anglo American. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 was up 25 points at 5,710, and the Frankfurt DAX-3 was 19 points higher at 7,827.
Across the Atlantic, a late rally led by oil major Exxon-Mobil saw the Dow Jones end the day 117 points higher, at 13,660. The tech-laden Nasdaq was up 30 points, at 2,825. And the S&P 500 was 18 points higher, at 1,520.
In Asia, the Japanese Nikkei had fallen to 16,096 - a 152-point drop - this morning as the stronger yen hurt exporters. Meanwhile, the firmer oil price gave Hong Kong stocks a bit of a boost, sending the benchmark Hang Seng index up 270 points to 29,708.
Crude oil futures had topped the $98 mark this morning and were last trading at $98.37 a barrel. Brent spot had climbed to $95.67 in London.
The oil price spike saw spot gold peak at $836.70 today before falling back to $835.20. Spot silver was at $15.77, off an intra-day high of $15.88, but still up from $15.37 in New York late last night.
In the forex markets, the pound hit a new 26-year high of 2.1015 against the dollar this morning and was last trading at 1.4307 against the euro. And the dollar had fallen to 0.6807 and 113.51 against the Japanese yen.
And UK consumer confidence dropped to its lowest level this year, according to a survey by Nationwide. The building society's chief economist, Fionnuala Earley, attributed 'a continued reluctance to spend' as the economy begins to slow. A separate survey out this morning also signalled weakness in the jobs market. According to the Recruitment and Employment Confederation and KPMG report, permanent placements by recruitment consultancies fell to a 13-month low in October.
Finally, our recommended articles for today...
Don't sign away your freedom for a purple Audi
- With house prices falling and repossessions rising, most rational people would think that now is a pretty bad time to be in negative equity. Yet Abbey is marketing a product that allows you to do just that - so that you could buy a new car. Merryn Somerset looks at the folly of 100% plus mortgages: Don't sign away your freedom for a purple Audi
The equity bull is on its last legs
- The resilient performance of global equity markets in the wake of the credit crisis has suprised some. Take a closer look at the credit crisis and it isn't so unheard-of after all. But that doesn't mean the good times can last. Niels Jensen of the Absolute Return Letter examines current market conditions - including the record oil price - here: The equity bull is on its last legs
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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