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Have gold prices still got one last low to reach and are gold shares a good hedge against getting that wrong?

 -- Published: Thursday, 29 January 2015 | Print  | Disqus 

By Peter Cooper

Elliott Wave theorists, and there a lot of technical chartists that follow their work too, argue that gold still needs to put in one last low price before it can be said to have completed the classic wave formation and then power upwards in a big price spike. If so how could this happen?

If we look back to how gold behaved in the 2008-9 Global Financial Crisis then the answer is pretty clear. In a really big market sell-off gold will tumble out of bed along with everything else. The good is sold off with the bad in such situations as many investors will have urgent margin calls from their brokers that demand immediate liquidation and gold is always eminently liquid.

Rebound potential

However, if we again refer to the GFC then what comes next is also clear: gold more than doubled in value of the next couple of years. In fact, apart from silver, gold was the asset to rebound fastest and most dramatically in the wake of the crisis. Why should it be any different this time?

This is probably why famous investors like Jim Rogers say they think gold will probably be cheap again one last time, although he has just bought some cheap gold mining shares because he’s not absolutely sure of being right.

That is quite a clever way out of the conundrum of whether or not to invest in gold now if prices are going to eventually go very much higher. Gold stocks are leveraged to the price of the metal and so you risk less to achieve the same upturn if the gold price rises with less exposure than pure bullion if it goes the other way. Mr. Rogers after all wrote the book ‘Hot Commodities’ ahead of just about everybody else.

Hence if you are worried about missing the boat on gold prices – and who really knows exactly how prices will pan-out, chartists have been blown out of the water many times in the past – buying equities in gold companies is probably a good idea.

Gold hedge?

Another veteran investor Marc Faber, author of ‘Tomorrow’s Gold’ that called the 2002-2011 gold bull market correctly, says he thinks junior mining stocks are the only thing worth buying in the stock market now. Technical charts show a recognizable bottom for these shares at the end of last year. And they may now be so cheap that even in a big sell-off in stocks they will not become much cheaper.

ArabianMoney tends to consider that the bears could well be right about the gold price needing to put in one last low, but that not need necessarily mean that now is not the right time to be buying gold stocks.

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 -- Published: Thursday, 29 January 2015 | E-Mail  | Print  | Source:

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