12-4-2008
Gold a winner for 2008?
Not really as Gold is down on a year to year basis.
Deflation, Inflation, Depression
Take your pick what 2009 will bring. My expectation, no matter the outcome in 2009, is that Gold will prove to be one of 2009’s better “safe haven investments”.
Just this year alone we’ve witnessed a burst in the inflation bubble along with a massive onset of deflation. We’ve witnessed so much deflation that Crude Oil Prices are down in but a few months over $100 a barrel, a loss of nearly 2/3rds of its value. Corn prices have fallen nearly 60% or so. Most major stock indices are down 40% or more this year.
Gold is also down this year as well. Gold closed 2007 near $840 an ounce. The February Gold contract is currently trading near $765, so year to date Gold has lost nearly $75 an ounce. A 9% loss year to date. Obviously Gold bought by foreigners trading in Euro’s or other major currencies to buy Gold may have turned a profit since the Dollar has rallied about 12% against many major currencies. However, getting fancy about Gold investing is not what it’s about.
As I see it, regardless of what economic outcome we see in 2009, my expectation is for Gold to play an important role in wealth preservation. Interest rates are so low that in some cases buying a treasury instrument costs more than the interest earned. More important, I see Governments around the world spending funds they don’t have in a desperate move to shore up their economies. Seeing the enormous amount spent by the US Government on bailouts means at some point the value of the Dollar comes into question. As such, I don’t have a lot of faith in the value of the Dollar holding up in 2009. If the Dollar falls, that should support Gold.
As simple as it seems, once money starts being lent by banks and Mortgage Company’s, that lending process will go a long way in removing fear about the future. Right now, the mentality is one of overwhelming doom and gloom, so much so that around the world people now fear another Great Depression.
Assuming Governments get money moving, once those funds begin to move through the economy, that money begins to chase goods and services. Goods and services that there will be fewer of due to the world economic slowdown. The seeds of inflation are therefore in place. It’s a change in money movement and economic mentality that is necessary to trigger it.
Keep in mind that at market bottoms things always look their worse, just as at tops they look their best.
Economically speaking, things are bad and look bad.
The Quarterly Gold Chart
When in the midst of Capitulation, I like to look at longer term charts. Namely the Quarterly Chart of Gold prices.
Prices on the Quarterly Gold Chart have prices trading over the 18-Quarter Moving Average of Closes, which is in and of itself “Bullish”. Support in this case is the 18-Period Average at 638.4.
The negative is that the “Swingline Study” shown in yellow, currently has a pattern of a Lower Lows and a Lower Highs, which is the definition of a Downtrend.
In order to reverse the momentum prices currently have to take out the most recent Swingline High, shown on this chart as 989.6.
Gold’s Weekly Chart
Let’s narrow in our time table and look at a Weekly Gold Chart.
A bit different story is shown here. The Swingline is up but prices are trading under the 18-Day Moving Average of Closes. This chart could turn Bullish by just prices just closing back up and over the 18-Week Moving Average of Closes. If that occurred, a purchase might be in order.
Stochastics (SSTO) are neutral, with readings in the 30 to 40 zone.
Daily Chart
The Daily Chart of February Gold is in the process of determining what next.
The Daily February Gold Chart is narrowing in. Support is seen between the 18-Day Moving Average of Closes and the last Swingline Low, 761.8. Prices can go either way since the Swingline Study is pointing down but prices are trading over the 18-Day Moving Average of Closes.
Gold’s Seasonal Story
To get an idea of the longer term picture, look at the Seasonal Chart below, as provided to us by The Moore Research Center...www.mrci.com.
Seasonally speaking, there is reason to go with an Upside Breakout if one occurs. Assuming February Gold holds and gets back over $822, the trend will turn up. On the Daily Chart this can also occur with a new Swingline High, one that moves down which is not difficult to do. Seasonality this year has been a hard act to follow, especially as outside markets continue to break down.
Deflation at anytime is something that can overwhelm Gold. It is Gold’s enemy, but one that I question if the Automakers get their bailout and if the Fed figures out a way to get Mortgage Rates down.
Conclusion and Recommendation
What to do?
Look to see if breakouts take place and go with them using Options, not Futures Contracts. Do not anticipate a breakout.
