Gold: Time to Buy...? - Saturday 27th June 2009

What's driving the Gold Price and how to spot the right moment to buy...?

JUST AS WE SUSPECTED, gold has fallen back to the low $900s and begun rising again, writes Julian Phillips of the Gold Forecaster.

Should we be buying? If only life was so simple and we could say to you buy at this price and sell at that price. If we did you can be sure the Gold Price would not quite reach the height nor reach the low we set. It would almost reach there or overshoot, leaving you wrong footed, as most people are at present.

So what do we advise?

Perhaps it is about "feel", but our "feel" comes from striving to understand and from paying close attention. In turn this comes from understanding a far from simple formula when it comes to gold and silver.

These markets react to monetary issue, to confidence factors and broad macro-economic events. They react to macro-economic and monetary uncertainty. And measuring this accurately is only part of the story.

One has to measure the different types of investors and their perceptions of when to Buy Gold and sell it. Now sum all this up with the correct weightings and you then add the usual demand and supply factors that one traditionally uses in metals markets.

In this piece we look at the short-term picture and why the Gold Price fell to current levels and why it should rise again. (The "when" is for Gold Forecaster subscribers...)

Currently the market is under the complete control of short-term traders in US Comex Gold Futures and options. They took the price up from the low $900s to above $985 an ounce and have since taken it back down. Very neatly they may have made as much $100 an ounce or more, provided they picked the bottom and the top. But we are told that only 52% of trades succeed, and we at Gold Forecaster believe the greatest investment success is made by investors who play the longer term, buying and selling only the major moves (30% plus).

That's why people have trusted their pension funds more than playing the market by themselves. Pension funds have to play for the long-term because they have long-term obligations. But in this scene, in the Gold Price, we're watching the ebb and flow of short-term traders driven solely by the technical picture, both of the precious metals and the US Dollar.

Now that the prices of gold and silver have run both up and down, they are left following the US Dollar. This is hard on traders, because both the Euro and the Dollar are weak, so why measure one against the other? However, it will soon be time for the long-term holders of gold to make their move.

Currently they are not heavy sellers, so don't expect the Gold Price trend to change. As buyers, gold owners are currently slowly accumulating and there have been recent sellers, but not in such volumes as to make the Gold Price rise or fall. They are biding their time for news that will trigger more purchases. Once you see a 10 tonne move, either way, in the holdings of the Gold Exchange Traded Funds (Gold ETFs), then you will see their influence come to bear.

It will take a forceful trigger to get the precious metal markets to move significantly one way or the other. We will have to wait for this market to tell us because it could go either way.

The Geithner/Bernanke team in Washington are expressing confidence in the progress of the bank saving and credit easing measures they have put in place. They believe that the US will recover quicker than Europe. We believe that China will recover quicker than both. The demands that China will have, are more pertinent to gold and silver than those of the US and Europe.

Gold and silver will react more quickly to the recovery in China than elsewhere. This is because the rise of China is unsettling for world investors who see the strains continuing to affect their investments in the future. Communist leader calls for the buying of more gold by China are not the same as government calls, but do tell us the way the gold tide is going there! The strains China will place on the Dollar and the Euro are already a matter of public debate. Remember it is not economic recovery that will cause gold to fall but the increasing of confidence in the global currency and monetary systems, if it comes? The stresses felt from July 2007 will return, unless convincing systemic reform is instituted.

So a further Gold Price rise looks as though it is already up wind of us. When will this kick in? The question now is, not one of trend, but of immediacy. We think we are moving to a point where the Gold Price may hang around $900 an ounce. That's if all remains quiet on the currency / monetary front, and it could take a while still.

Being so near to the bottom now and in a world where dramas can appear almost overnight we prefer to be in the right position now and have to wait a little bit for the rise to begin, rather than be out and have to buy on the rise. That rise may well be quicker than we expect. With the short-term traders bringing the gold and silver prices back down to where they last took off from, they are ready to open new positions. You can be sure that at the first sign of volume purchases of the shares of the Gold ETFs, the short-term traders will storm in again accelerating the rise and heightening it.

Having said that, it is crystal clear that when the gold and silver prices take off they will do so rapidly, so we can be caught off-guard easily. This time it may well go further up the price ladder than ever before...?

Julian D.W. Phillips, 27 Jun '09