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Sunday, December 7, 2008

Some rumblings on Gold prices

I'm not a Gold trader, I have never traded any Gold contracts in my entire life.

However, I do cast a glance from time to time at Gold prices as part of my personal monitoring of the global financial markets. I also noted that a few of the chatters in the chatbox have long positions on Gold, and was previously (and currently?) very bullish on Gold.

So, I was most interested to read this article on Gold in Seeking Alpha today. (want to see if I should jump on the Gold bandwagon or not). The title is "The Manipulation of Gold Prices". The link is here - http://seekingalpha.com/article/109210-the-manipulation-of-gold-prices?source=article_sb_popular

The article is rather lengthy, but what got my attention (and rang a loud alarm bell) is the most amazing claim by the author. In his own words ...

"... It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers. ..."

Gold closed $752.2 per ounce last Friday, i.e. this author claims gold has the potential to rise 10 fold at the very least!!!

Anyway, I decided to take a look at the Gold charts to see if there is anything interesting there.

Here's a 3 year chart of Gold from stockcharts.com.

Some quick observations:

1. Price generally trending upwards (last 3 years), but with increasing volatility (this year). The latter is evidenced clearly from the daily price range which is clearly wider than in the past (and the widening MACD this year compared to prior years). The increasing volatility at the "tail's end" is not usually a good signal, as it signifies huge uncertainty.

2. Prices have fallen BELOW the 200 day Moving Average. In fact, prices dipped BELOW 50 day Moving Average as well. Unlike in November 2006 when the 50 day MA crossed below the 200 day MA only very briefly and then recovered, this time, the 50 day MA crossed below 200 day MA in September 2008, and does not appear to have the strength to cross over it again. The conventional TA interpretation is a bearish bias to Gold prices.

3. Since March 2008, the trend is bearish. You can see this from the lower highs in March 08, July 08, October 08. The most recent peak at end of November 08 is even lower. A series of lower highs is traditionally interpreted as having a bearish bias, not a bullish bias. The resistance level to watch is around $840 to $900.

4. There is also a series of lower lows in May, August, September, October 2008. Again, pointing to a bearish bias.

5. Bearish biased MACD - the black line just crossing below the red line.

6. The RSI reading is neutral at 44. Neither here nor there, and doesn't appear oversold yet.

In short, the technical view is that over the near term, the bias on Gold prices is bearish.

So, at this juncture, I would personally tend to ignore the author's claim of 10 fold increase in prices from today's levels. At the moment, it looks like a "grand dream". In fact, I just don't know how Gold can go to $2,000 in the near term. I don't have any gold trading positions (except for some family ornaments which are negligible holdings and definitely NOT for trading).

The other thing that's on my mind is the traditional view that Gold is often seen as a good storage of value during times of uncertainty. For example, I would say that this year is definitely a time of HUGE uncertainty. Everywhere I look, I see fear, whether this is in our local stockmarket, Asian stock markets, Global stock markets, commodities markets, the collapse of global shipping rates, the collapse of US interest rates and global interest rates following suit, etc. There's probably isn't a time of greater uncertainty globally like the one we are facing today in my adult life. (The last Asian Financial Crisis is not truly a global event, even though it was a huge uncertain period in Asia.) And yet, despite this huge global uncertainty, gold price DID NOT make a new high.

I don't know how to explain this.

Perhaps it's global gold price manipulation as the author suggested. Perhaps it's natural supply and demand, where miraculously, every time when there is pressure for demand to rise, supply miraculously appeared to reduce pressure on Gold price.

Anyway, my point is that technically, in the near term, Gold faces a bearish price bias.

Technically, support appears at around $650. I could be tempted to take a small position at $650 long, but more of a paper trade than an actual trade.

As someone who hasn't really monitored nor traded Gold before, I would be tempted to trust the charts a lot more than the so-called "fundamentals" of Gold written by one or a group of analyst. Superficially, it seems to me that in order to be a good gold analyst, one must truly understand a lot of factors such as history of gold price manipulation, the various Gold prices, products and markets such as spot and futures especially COMEX, the major gold reserves held by central banks around the world, and their policy and practices individually and collectively towards the release of such gold reserves (if any), the value differences towards gold in various parts of the world, the claim of manipulation involving CFTC (Commodity Futures Trading Commission) and various conspiracy theories, a good understanding of how margins actually work in various gold futures markets, the attitude of global insolvent banks towards gold in today's times of global crisis and how their attitude will change in future, the role (if any) of the Feds, US Treasury that could influence Gold prices, the relationship of the USD and Gold prices, the relationship between stock prices and Gold (if any), global Gold inventories, future technological usage of gold (?), in short, the entire topic of supply and demand of Gold that goes beyond superficial or general, widely available understanding, and how that ever changing demand/supply relationships influence Gold prices in the immediate, short, mid and long term.

In short, at this moment, I don't think I'm in that elite group of the world's Top 5% Gold analyst/players globally.

Maybe, I'll just stick to paper trades and general monitoring of Gold *grin*


Seng said...

After I wrote this article, I came across another article which came to similar conclusions as I did. The article is here - http://seekingalpha.com/article/109400-is-it-time-to-buy-gold?source=article_lb_articles

For future reference.

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