AN INSIGHT INTO GOLD
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CONTENTS Introduction Gold Price Forecast of 2011 U.S Dollar Weakness Central Bank Reserves Investors’ Interest Who Is Buying Gold 15 Fundamental Reasons to own Gold Technical View
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Introduction Gold is a ubiquitous metal. Its uses vary from a milk man’s wedding to the crown of the queen. The preference for gold ranges from ornamental value to increasing investment options. The prices of Gold are witnessing an unprecedented rise in the recent past. In 2009 the price of gold registered an increase of around 15 percent. In the last three years there has been a 70 percent increase in the price of the yellow metal. Forecasting or predicting the price of gold is not an easy task. There is not a simple formula or chart to consult when guessing where bullion prices will be in 2011. The entire economy is similar to a living breathing organism with many complex parts. Isolating any one aspect is done with the risk of being inaccurate. The price of gold is a difficult number to determine in the overall economic outlook. To even begin the less than scientific process of forecasting the price of gold, an investor would need to comprehend what is fundamentally behind gold prices. What drives the price of gold up or down? What are the reasons for this rise? This question is perplexing everyone from an economist to a common man across the world.
Gold Price Forecast of 2011 There are some business applications for gold such as contacts and wires in semiconductors, or the use of gold in medical instruments. But has the rising price of gold from 400 to 1,400 dollars per ounce in 5 years really come from the industrial or even the jewelry market? There is another factor to consider. The value of paper currency can be quite volatile. The FOREX market will take a currency pair for trading and chart the relationship. Look at how the US dollar and the Yen changed relative values over time. In 2002, one US dollar was worth 135 Yen, and in 2010 this amount fell to a mere 85 Yen. Why is the price of paper currency so unstable?
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•
Political unrest
•
Economic depression
•
Rising Inflation
There are many other micro-factors that affect gold prices, but essentially it is seen as a form of currency with backing. Gold trading is an alternative monetary system when the local government is in distress. Gold can be easily traded anywhere in the world so its value is not tied directly into the country of one’s origin. Gold is the warm blanket that many pull around them when fear of the outside world looms. With the economic and political problems around the world it is easy to understand why many would desire a form of currency that has intrinsic value.
Gold Price Forecast for 2011 High from US Dollar Weakness
Traditionally, gold has been used as a hedge against the falling dollar. The idea behind this trading is that gold is an alternative to currency that is not as strongly influenced by any one economy. The relationship between gold and currency is an inverse one. In addition to this, as gold is often quoted per ounce in US dollars, investors with alternative currencies may find that their native dollar stretches further with more value when the US dollar falls.
Central Bank Gold Reserves Buying Affect Predictive Price Models Per Ounce
Central banks typically hold gold as a portion of their reserves. If central banks engage in net buying of gold this can drive spot prices up; if they sell, the price per ounce may subside. Jeffrey Nichols, a leading precious metals economist for over 25 years, states that China may be looking to add 5,000 tons of gold to their central bank reserves over the next three to five years. If this is true, gold may have a supply downfall with this
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potentially increased demand in 2011 as well as the following years -- thus extending the bullish trend.
Investor Interest Increasing in Futures and Commodities
Another factor boosting the value of gold is the rising interest in commodities from individual investors and investment funds alike. The recent decade has provide market speculators an increasingly easy way to trade gold, silver, oil, coffee, and other commodities through chart trading platforms in their own home. As the spot price of gold continues to rise, this creates a self-generating buzz of excitement which in turn leads to higher prices yet again.
Who is Buying Gold and Driving Prices Up? In recent years there has been a large surge of interest amongst the commodity market traders, but many others are buying gold too:1. Ordinary people can open up their trading platform and buy and sell future contracts of gold. 2. The government can accumulate gold in its reserves. While paper currency is good for funding local projects, gold is a better form of payment when dealing with other countries. 3. Banks may add gold to their reserves as well. 4. Stock traders can buy and sell gold based ETF’s or exchange traded funds. All of these sources create a buying and selling pressure that will ultimately drive up the price of gold or crash it down.
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15 Fundamental Reasons to Own Gold
Global Currency Debasement
The U.S. dollar is fundamentally and technically very weak and should fall dramatically over the next few years. However, other countries are very reluctant to see their currencies
appreciate
and
are
resisting
the
fall
of
the
U.S.
dollar.
Thus, we are in the early stages of a massive global currency debasement which will see tangibles, and most particularly gold, rise significantly in price.
Rising Investment Demand
When the crowd recognizes what is unfolding, they will seek an alternative to paper currencies and financial assets and this will create an enormous investment demand for gold. Own both the physical metal and select mining shares.
Alarming Financial Deterioration in the U.S.
In the space of two years, the federal government budget surplus has been transformed into a yawning deficit, which will persist as far as the eye can see. At the same time, the current account deficit has reached levels, which has portended currency collapse in virtually every other instance in history.
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Negative Real Interest Rates in Reserve Currency (U.S. Dollar)
To combat the deteriorating financial conditions in the U.S., interest rates have been dropped to rock bottom levels, real interest rates are now negative and, according to statements from the Fed spokesmen, are expected to remain so for some time. There has been a very strong historical relationship between negative real interest rates and stronger gold prices.
Dramatic Increases in Money Supply in the US and Other Nations
Authorities are terrified about the prospects for deflation given the unprecedented debt burden at all levels of society in the U.S. Fed Governor Ben Bernanke is on record as saying the Fed has a printing press and will use it to combat deflation if necessary. Other nations are following in the U.S.'s footsteps and global money supply is accelerating. This is very gold friendly.
Existence of a Huge and Growing Gap between Mine Supply and Traditional Demand
Mined gold is roughly 2,500 tons per year and traditional demand (jewelry, industrial users, etc.) has exceeded this by a considerable margin for a number of years. Some of this gap has been filled by recycled scrap but central bank gold has been the primary source of above-ground supply.
Mine Supply is anticipated to Decline in the next Three to Four Years
Even if traditional demand continues to erode due to ongoing worldwide economic weakness, the supply/demand imbalance is expected to persist due to a decline in mine supply. Mine supply will contract in the next several years, irrespective of gold prices,
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due to a dearth of exploration in the post Bre-X era, a shift away from high grading which was necessary for survival in the sub-economic gold price environment of the past five years and the natural exhaustion of existing mines.
Large Short Positions
To fill the gap between mine supply and demand, Central Bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tons (30-50% of all Central Bank gold) is currently in the market. This is owed to the Central Banks by the bullion banks, which are the counter party in the transactions.
Low Interest Rates Discourage Hedging
Rates are low and falling. With low rates, there isn't sufficient contango to create higher prices in the out years. Thus there is little incentive to hedge and gold producers are not only hedging, they are reducing their existing hedge positions, thus removing gold from the market.
Rising Gold Prices and Low Interest Rates Discourage Financial Speculation on the Short Side
When gold prices were continuously falling and financial speculators could access Central Bank gold at a minimal leasing rate (0.5 - 1% per year), sell it and reinvest the proceeds in a high yielding bond or Treasury bill, the trade was viewed as a lay-up. Everyone did it and now there are numerous stale short positions. However, these trades now make no sense with a rising gold price and declining interest rates.
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The
Central Banks are nearing an Inflection Point when they will be Reluctant to
provide more Gold to the Market. The Central Banks have supplied too much already via the leasing mechanism. In addition, Far Eastern Central Banks who are accumulating enormous quantities of U.S. Dollars are rumored to be buyers of gold to diversify away from the U.S. Dollar.
Gold is increasing in Popularity
Gold is seen in a much more positive light in countries beginning to come to the forefront on the world scene. Prominent developing countries such as China, India and Russia have been accumulating gold. In fact, China with its 1.3 billion people recently established a National Gold Exchange and relaxed control over the asset. Demand in China is expected to rise sharply and could reach 500 tons in the next few years.
Gold as Money is Gaining Credence
Islamic nations are investigating a currency backed by gold (the Gold Dinar), the new President of Argentina proposed, during his campaign, a gold backed peso as an antidote for the financial catastrophe which his country has experienced and Russia is talking about a fully convertible currency with gold backing.
Rising Geopolitical Tensions
The deteriorating conditions in the Middle East, the U.S. occupation of Iraq, the nuclear ambitions of North Korea and the growing conflict between the U.S. and China due to China's refusal to allow its currency to appreciate against the U.S. dollar headline the
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geopolitical issues, which could explode at anytime. A fearful public has a tendency to gravitate towards gold.
Limited Size of the Total Gold Market Provides Tremendous Leverage
All the physical gold in existence is worth somewhat more than $1 trillion U.S. Dollars while the value of all the publicly traded gold companies in the world is less than $100 billion US dollars. When the fundamentals ultimately encourage a strong flow of capital towards gold and gold equities, the trillions upon trillions worth of paper money could propel both to unfathomably high levels. There is no definitive answer to where the price of gold will be in 2011. The best an investor can do is to look at possibilities based on historical data. If an investor assumes that paper currency will continue its debasing trend, what would be a high estimate on gold prices per ounce? To answer that one needs to look for the highest that gold has been in the past. January 21st, 1980 saw the price of gold reach 850 US dollars per ounce. To understand how much money this is worth today one would need to adjust the figures according to the Consumer Price Index. 850 dollars in 1980 is worth 2,250 US dollars in the year 2010. If gold were to repeat the value of a previous high it could double from the price it is trading at in June of 2010. Other analysts suggest that because the current economic output is many times greater than 30 years ago, the peak price of gold could even reach 5,000 dollars per ounce. On the other hand the argument could be made that markets are based on mass psychology and trader emotions. Some might suggest that the average person would not believe that the price of gold could ever reach up to 5,000 dollars, thus creating a
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resistance to that level ever being achieved. Some analysts believe that as the market recovers in 2011 and beyond, the price of gold will retreat dramatically as the economic woe gets pushed to the backs of people’s minds and their hedging tactics are tossed aside. In next section, we have illustrated our technical view on Gold by presenting its various averages, Fibonacci retracement levels, Expansion levels and indepth analysis using various technical indicators on different time frames of charts supporting our technical view, and on the basis of these our technical target on Gold.
TECHNICAL VIEW Gold CMP - $1458.10
Target Price - $1600
Moving averages Moving Averages Daily Weekly
20 Day $1440.28 $1399.67
50 Day $1421.77 $1318.82
100 Day $1395.02 $1185.95
200 Day $1363.07 $1012.99
Fibonacci retracement levels SCRIPT Gold
0.0% $680.9
23.6% $762.7
38.2% $813.5
50.0% $855.7
61.8% $895.9
100.0% $1031.2
161.8% $1246.9
261.8% $1597.8
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Expansion levels SCRIPT Gold
38.2% $1247.8
50% $1315.3
61.8% $1379.6
76.4% $1456.8
100% $1588.7
138.2% $1794.4
150% $1861.9
161.8% $1926.3
Weekly Pivot SCRIPT R4 R3 R2 R1 P S1 S2 S3 S4 Gold $1601.4 $1554.1 $1506.8 1506.8 $1489.8 $1459.4 $1442.5 $1412.1 1412.1 $1364.8 $1317.5
We will study the expected movements for Gold from Elliot Wave Theory point of view. The weekly chart below shows the first 5 5- wave pattern which is called impulse waves. In this pattern waves 1, 3, 5 are motive, meaning they go along with the overall trend, while waves 2 & 4 are corrective waves.
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We have numbered the waves starting from the wave 1 low of $681 and concluded that wave 5 is extending. This opinion is based on the size of the corrections since the wave 4 low at $1044. The following analysis of the minor waves and their relative proportions should make this quite clear:Wave 1
680.9 to 1006.1
+325.0
+47.75%
Wave 2
1006.1 to 864.4
-141.7
-14.08%
Wave 3
864.4 to 1226.2
+361.8
+41.85%
Wave 4
1226.2 to 1044.0
-182.2
-14.9%
Wave 5
is extending‌
The similarity of the 14% declines of the corrective wave 2 & 4 above indicates that they are part of the same impulse wave. The much smaller declines of 8.6% and 8.7% are evidence that wave 5 is still extending. Extended wave 5:Wave 5.i
1044.0 to 1265.0
+221.0
+21.2%
Wave 5.ii
1265.0 to 1156.6
-108.5
-8.6%
Wave 5.iii
1156.6 to 1431.3
+274.7
+23.8%
Wave 5.iv
1431.3 to 1307.5
-123.8
-8.7%
Wave 5.v
1307.5 to 1601.5
+294
+22.47% (forecast – assumes the same % gain as in average of 5.i & 5.iii)
Total 5
1044.0 to 1601.5
+584
+53.4%
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If we assume that 5.v is an average of the 5.i and 5.iii gains of 21.2% and 23.8%, say 22.47%, the he target for 5.v would be $1601 $1601.. One further possibility is that the gain in wave 5 equals the overall gain in waves 1 through 3, i.e. from $680.9 to $1226.24 $ which is equal to $545.. This provides a target of $10 $1044 + $545 = $1589. This concludess the end of intermediate wave 5 of Major Three. The decline ine to follow the peak of wave 5,, (the peak being somewhere between $ $1585 and $1610), ), should be of a magnitude of 14% to 16%. Also supporting the $1600 forecast will come close to achievement during the up-move up is the trend line we have drawn below on the monthly chart of gold from the troughs of May 2006 and the upward channel which has the resistance at $1612.
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In the weekly chart of Gold below, is its Fibonacci retracement racement of downtrend starting from March 2008 to October 2008. If we see see,, the gold breached the 100% retracement during October 2009. It took gold a year to fully recover from the downtrend. After that the gold took ook resistance and consolidated at the retracement level if 161.8%. The gold breached 161.8% retracement level in the late 2010. Since then the gold is in the uptrend taking support at the $1300 level. The next retracement of 261.8% 261. is at our previously mentioned target of $ $1590 - $1610. The ascending triangle formation also suggests an upward breakout in gold but before that it may pullback back to take support at $1430 level.
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Below is the weekly chart of G Gold.. We have drawn trend line from the troughs of March 2008 and if analyze the trend line we find that Gold has taken solid support on the trend line in the recent months. So if we go by the trend line then we can assume that gold may show some profit bookin booking g at $1390 which almost coincide with the Fibonacci expansion level of 61.8%. W We have seen an expansion of Gold prices from $681 to $1226 1226 where it formed a sol solid support at $1044 and headed for its next uptrend. uptrend Currently the gold has breached the expansion level of 76.4% at $1455. From here the gold is headed towards the expansion level of 100% at $1590 which again coincide with our fibonacci retracement of 261.8% and our target range of $1590 - $1610.
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To support pport our calculations on G Gold old we have applied some indicators to show you the trend of gold which is in general reasonably bullish. In the weekly chart below we have applied Ichimoku Kinko Hyo (IKH). It is an indicator that gauges future price momentum and d determines future areas of support and resistance. In the chart, the price is above the Senkou span (Orange), the top line serves as the first support level while the bottom line serves as the second support level. Meanwhile, the Kijun Sen acts as an indicator of future price movement. The Gold price is higher than the blue line; so this means it could continue to climb higher. The Tenkan Sen is an indicator of the market trend. The red line is moving up which pretty indicates that the market et is in uptrend. Lastly, the Chikou Span or the green line is crossing the price in the bottom-up up direction, so that's a buy signal.
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We have also applied the Parabolic arabolic SAR (Stop & Reversal) on the weekly chart of the gold below which simply focuses on catching the beginning of new trends. In the Chart you can see that the dots shift from being above the candles during the minor downtrend to below the candles when the trend reverses into an uptrend. ptrend. The 14 day RSI is also above the zone of 50 which signifies that the precious metal is bullish.
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