Despite its recent falls, gold is set to rise significantly by the end of the year - and history suggests this month could be the ideal time to buy. Dominic Frisby explains why.
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Who would be an investor in these markets? Portfolio screens across the globe in virtually every asset class are a grim, grim scarlet. Oh, for some green. Yes, the general markets rallied yesterday, but that was just noise. We all know they're toast.
I know many who are considering throwing in the towel. What's an investor to do? Property? Toast. Commodities? In a nasty correction. Equities? See above. Cash, then? Maybe but which currency? The dollar? Yeah, right. The pound? See the dollar. The Euro? Overvalued. The Yen? No interest. The Canadian dollar? Vulnerable to a commodities correction. Which leaves, er, Swiss Francs? Not bad. I own some.
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And, of course, there's always gold. Yes, I know it's down almost $100 in ten days; yes, I know I'm always harping on about it, but hear me out. In my opinion, we're near a low.
Why you should buy gold now
Here is a monthly chart for gold since 2001, when this bull market began, with arrows pointing to August. You can see that every year except 2006 the markets rallied from August to the end of the year.
I see no reason why this pattern shouldn't recur this year, with a low set some time over the next fortnight or so, followed by a nice bullish move into year end.
The problem is how much further has it to fall?
Well, I have been buying more physical this week. I don't care if it falls another five percent. I'm confident it will rise a lot more in the future. I'd rather own physical gold than just about any other asset and the fundamentals whether it's declining supply, increasing demand, the time of year, insolvent banks, global financial crises, money supply growth, inflation, you name it get stronger and stronger.
That said, if you want to get really technical and bottom fish, I would suggest $850 is a likely target area. That was the old 1980 high. It was a strong point of resistance late last year, but, ever since, it's proved a support level. What's more, the 52-week moving average (green line) has been a very reliable bottom caller in the past and that currently lies at $855.
But it may be that we saw the low yesterday and we'll get a straight bounce off the trend line.
The ferocity of this down move has me very nervous. But then I remind myself: don't panic-sell gold in August. The fundamentals for gold haven't changed.
Here's a stat for you: since 2000 there have been huge corrections in gold on an almost annual basis. There have more than 10 corrections of 10% or more. There have been five yes, five - of 15% or more. Typically they are fast and violent. With silver the turbulence has been ever more bone-shaking. Bull markets are volatile. They try to throw you off. Hang on.
Gold has a habit of making big six- to nine-month moves, followed by extended periods of consolidation, lasting sometimes a year or more. We had the big move from $650 to $1,020 and are now in another such period of consolidation. It's possible we may not see new highs for some time yet, but I see us ending the year considerably higher than where we are now.
An investment that will hold its value
And what you really need in these troubled times is an investment that will hold its value. I was voicing a documentary yesterday about 1988. A pint of milk,' read the script, cost just 26p and a loaf of bread 30p'. Then, driving home, I heard a wonderful fact on the radio: according to the Old Testament, during the reign of King Nebuchadnezzar, an ounce of gold bought 350 loaves of bread. If an ounce of gold today is about £450 and a loaf of bread about a pound, depending on where you shop, you can see that its purchasing power has been maintained. Yet in the UK, measured in bread, we've seen our pound's purchasing power decline quite substantially - even if you shop in Gregg's.
Turning to the wider markets
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After three down days, UK shares enjoyed a strong rally on the back of a Wall Street bounce, with the FTSE 100 index advancing 134 points, or 2.5%, to 5,455. Financial stocks led the recovery, with Legal & General climbing 12% after first-half profits beat expectations, while within banks, Royal Bank of Scotland added 7%, Standard Chartered 8% and Barclays 9%. Property firm Segro advanced 4.4% on bid talk, while headhunter Michael Page soared by a third after confirming an approach from Adecco.
Shares in Europe joined the party, again with financials leading the way, as the Xetra Dax gained 2.7% to 6,519 and the French CAC 40 put on 2.5% to 4,386.
The US rally came on the back of a three-month low in oil prices and the Federal Reserve keeping interest rates on hold. The Dow Jones Industrial Average soared 332 points, or 2.9%, to 11,616, while the wider S&P 500 rose by a similar percentage to 1,285 and the tech-heavy Nasdaq Composite fared almost as well, gaining 2.8% to 2,350.
Overnight the Japanese market jumped 2.6%, 340 points, to 13,255, though in Hong Kong the Hang Seng slipped 565 points, 2.5%, to 21,950.
This morning commodities were mixed, with Brent spot trading down at $117, spot gold at $885, silver at $16.71 and platinum at $1583.
In the forex markets this morning, sterling was trading against the US dollar at 1.9570 and against the euro at 1.2623. The dollar was trading at 0.6452 against the euro and 108.37 against the Japanese yen.
In the London stockmarket this morning, Xstrata, the world's fourth largest copper producer, made an unsolicited £5bn bid for the platinum producer Lonmin, at a price 42% higher than the latter's closing price last night.
Our recommended article for today...
How the Federal Reserve could destroy the dollar
- Inflationary policy responses to the credit crisis will only damage confidence in paper money, says Dan Amoss. Investors should instead look to gold, energy, and other natural resources. To read more, click here: How the Federal Reserve could destroy the dollar
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