Gold Guidance

Gold has had a rough 2013 to date, losing 25% in dollar terms and more if measured in many other currencies. Gold-mining funds have faired even worse, with many of the better known ones losing investors 50% or more, which shouldn’t really surprise anyone as they are a “geared” play on the metal, great while the metal is rising but not when it moves the other way.

Many investors’ take their que from policy-makers, particularly the central banks, backed by their teams of economists, who “surely must know” what’s going on? All the fuss of late in respect of QE and other stimulus measures are tantamount to this.

We have been at pains to point out the folly of following any CB’s guidance as they are reactive rather than proactive, as one can quickly deduce by looking at a chart of the interest rate cycle, they follow the market not lead it. Furthermore, as with most economists and indeed investors, they tend to look at the past trend and extrapolate it forward.

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As such CBs do have there uses, as a contrarian indicator!

One glance of the above chart tells you all you need to know about their “timing expertise.” At the low for gold, between 1999 and 2001, after the metal had been falling in price for two decades, 15 Central Banks, including the Bank of England, sold their gold reserves. In fact, according to Bloomberg, they sold 4000 tons of the stuff as the price tripled between 1999 and 2008.

Fast forward to 2010/11, just before the price high, Central Banks’ became large buyers, going on to “buy the dip” post the September 2011 peak and snapping up 535 tons last year, according to the World Gold Council, who somehow saw this as bullish.

We have tried to provide some guidance on gold within this “charting blog,” highlighting back in December 2012 that the divergence between the metal and the mining indices was unsustainable and then in April of this year pointing out the importance of the $1527oz “support shelf,” shown above as the red dashed line, and why a breach of it would likely be followed by a slump.

So what of the future for the price of gold?

In reality nobody knows. They can analyse all they like about the inflation/deflation debate or the supply/demand dynamics, but nobody really knows.

That said, a good understanding of “technical analysis,” or charting, can certainly help in the decision making process. Also, an atunement to “sentiment and contrarian indicators,” such as the Central Bank observation above, can be worth its weight in…….err, Gold.

Fortunately for us, and for our paying clients, we have developed a timing model for gold, along with other asset classes, called Investmentimer. The results in respect of the gold model can be seen below, which to date has performed rather well since it went live in August 2010.

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As they say, “the past is no guarantee of the future,” but to date it’s achieved a 58% return against the metals 3% round trip, capturing most of gold’s up swings, whilst avoiding most of the down swings.

The black line, incidentally, is the performance of one of those best known gold-mining funds’, mentioned at the start of this piece. Ironically, over the period shown, the mines have not only trailed badly against the metal as it approached its 2011 peak, they have massively under-performed the metal during the down-swing to date.

Ouch, give me guidance!

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One response to this post.

  1. […] it’s been just over a year since our last comment on Gold, entitled “Yellow Peril,” and, “Gold Guidance,” shortly before, it’s an asset class that we have certainly not forgotten […]

    Reply

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