Get Ready for Cheaper Gold

Who doesn’t like a bit of bling! Would you like it as 9 Carat, 18 Carat or 22 Carat? Come on step up step up, the price of Gold has fallen by 40% from $1,914 an ounce to $1,100 and surely it must be a bargain now right? Well…is it?

If you’re family is anything like mine then chances are that you have probably amassed a bit of gold jewellery over the years. This can add up to be significant in value especially as Gold has historically gone up in price. Right now though, the picture is unclear as to whether Gold is at a great price to buy or whether it still has more room to fall.

I remember in 2011 when Gold got to it’s all time high of $1,914 and everyone was bullish. Some were saying it was going to head up to $3,000 an ounce and we need to buy as much of it as we can. There were adverts everywhere in the UK from companies saying “WE BUY GOLD, BEST PRICES PAID” – remember those? There was even a Sun Page 3 Model talking about why Gold was such a great investment – I mean a page 3 model? Really? Even Network Marketing companies came out of the woodworks with their clever saving scheme’s designed to get you buying silver and gold bullion instead of holding cash. The arguments were convincing to the uninitiated because they compared the value of cash which was depreciating at the time with precious metals which were appreciating massively. The shiny stuff was certainly the flavour of the month! Then it crashed!

What happened?

Fast forward to today and you rarely see an advert for “WE BUY GOLD” anymore, also no one is talking about why precious metals are such a great investment over cash, all the clever bullion buying investment schemes have long gone and now everyone is unsure as to what to say about the precious metal anymore. So let’s get some insightful perspectives.

Firstly it is true that Gold has gone up over the long term. It is the third highest appreciating asset after property and equities, so owning some bling on the whole is a good idea. However, there are some features about Gold which make it an unattractive investment vehicle. For a start you don’t receive an interest on holding the precious metal whereas for property you generally get rent and in the case of equities you would receive dividend for owning them. This means you are solely relying on the future price appreciation of Gold as being the main reason for owning it.

Is it Worth it?

An asset is deemed to be a good investment if it is secure, has a high probability of appreciating, and is able to give you a return while you wait for it to appreciate. This is what makes the stock market so attractive because you can invest in blue chip companies like IBM, Microsoft, Apple etc safely knowing that they are likely to increase in price over the long term. You will also receive dividend in the meanwhile. Look at the chart of IBM below:

Monthly Chart of IBM

If you had invested in IBM in late 2008/early 2009 you would have tripled your investment by 2013 – just four years later! Along the way you would have received dividend payouts of around 3% per year. IBM is currently sitting at $144 per share which means you would still be up 200% on your investment. Compare this with the chart of Gold below:

Monthly Chart of Gold

An Ounce of Gold in late 2008/early 2009 would have cost $680 per Ounce and by 2011 you would have almost tripled your investment. However, the difference is the huge decline that took place after resulting in Gold currently sitting at $1,115 per Ounce. This represents 165% return on investment – less than what you would have received for IBM. Remember also during the whole time that you wouldn’t have received any dividend payments on Gold which means your net returns are therefore much lower than that for IBM. The one advantage Gold had over IBM was it rose faster so that it had tripled in value by 2011 whereas it took IBM a further two more years to achieve the same level of return. But here also lies the danger because Gold fell just as rapidly as it arose meaning you need to time your entry and exit into this asset very carefully so you don’t get wrong footed!

The Benefit of Gold

Gold is good to own during times of economic uncertainty as it becomes a safe haven during a period when people lose confidence in paper money and the banking system. This is why it rose massively during the credit crunch of 2008 onwards, because investors were fearful about putting money elsewhere other than Gold. Think about it, if you lose confidence in paper money, the stock market, property or any other asset as you see it going down in value, what is the only option you have? To put what you have into something you believe will not lose value – and this is Gold as it has always been the asset of choice for such times. One could argue that Gold is the only real currency of the world as every currency was at one point linked to the amount of Gold reserves the central bank of a country had in it’s reserves.

The Drawbacks

Owning the shiny metal can be risky during times of prosperity as investors are then lured into other investments which yield a higher return such as stocks and property. This is why Gold has declined over the last few years due to quantitative easing making a flood of money available to help prop up the stock market. Since we are in a stock market and real estate bubble, owning Gold makes little sense as you will achieve higher returns elsewhere.

The Outlook

Let’s examine the technical picture and begin with the monthly chart of Gold over the long term:

Long Term Gold Chart

The long term picture is bullish so there is no doubt that price will rise over time. The immediate picture is mixed because we are sitting at a critical price level of $1085 which is the 50% Fibonacci retracement of the entire move up as drawn on the chart. If price breaks below this level then this will mean it is heading lower towards $890 which is the next test and then to $720 where the low of 2008 is likely to provide effective support.

Bearish Triangle on the daily chart

If we dive into the daily chart below, we see a bearish triangle formation which has been created over a 4 month period. A bearish triangle is a manipulation pattern in which smart money squeezes price into a triangle until it breaks out of one side and results in a large move afterwards.

Daily Gold Chart

You can clearly see the triangle which is characterised by higher lows and lower highs simultaneously. Since this is often a continuation pattern, we would expect price to break out of it to the down side and hence result in price going lower. If you look closely, you can see the 50% Fibonacci level identified earlier sitting just below the triangle so this could be a good place to go short from if price breaches both the triangle low and the 50% fib level.

Conclusion

If price breaks below the triangle low then that will be an initial place to go short from. The next obstacle will be around $1080 which is the 50% fib level and if price breaks and closes below this then it is likely to continue declining further. If on the other hand price breaks above the high of the triangle and above $1,170 which is the most recent resistance level then this could represent a buying opportunity on the expectation of higher prices.

Trade or Invest?

I would argue in the current economic climate it is better to trade Gold rather than invest in it. It therefore means we will be looking to identify trading opportunities like what we identified above with the view point of holding the trade for days or weeks as apposed to months or years. Of course if we suddenly go into a crisis then we can hold on to a trade for a lot longer and effectively turn it into an investment. These days you have many ways of benefiting from the movement of an asset without having to own it and Gold is no exception. You could buy a Gold CFD, an ETF, an option or a speardbet depending on where you live and which products are available to you. In this way you can start off with a short term trade and turn it into a long term one once price has moved sufficiently in your favour. Whatever you decide to do I hope you profit from it!

Final Thoughts

During stock market boom – invest in stocks and real estate i.e. speculation

During stock market crashes – invest in Gold and Silver i.e. conservation

Other times – consider diversification so that you invest in a range of assets and markets to reduce risk while giving you sufficient exposure to investment opportunities