Gold Bulls – Are They In Retreat?

February 1, 2010 | By | Reply More

Gold IngotIn the second week of January spot gold traded at a high of just over $1160 an ounce. Today, Feb 1st., less than three weeks later we are looking at early European trade of $1080, which is about as low as it has been this year. Does then mean that gold bulls are in retreat? We do not think so, in fact far from it!

While stock markets have been in retreat and that new engine of the world’s economies, China, is being interpreted as another bubble waiting to burst, gold and to a greater extent silver have followed the herd down.

The threat of hyperinflation as a result of the ever diminishing value of the artificial money creation practiced by governments has taken a back seat. The dollar has strengthened because the principal traded currencies that emanate from the EU and countries are perceived to be in a more critical situation than the US whose underlying attraction remains that it is the world’s reserve currency.

Add to the melting pot the realization that the western economies remain in a mess despite the never ending stream of paper money being poured into them that has not resulted in job creation or the essential funding required by so many small business that keeps them afloat.

That housing sales will remain in the doldrums until employment and job security picks up is an obvious given. If and when it does pick up it will be as a consequence of the business cycle improving and that is when hyperinflation will show it’s ugly face!

That will be good for gold, silver and to some extent PGMs (platinum group metals).

The conclusion that we have come to is that it is inevitable in the longer term that these metals will hugely prosper and that we will hang on to our core holdings of the physical metals and top class mines.

So what of the shorter term?

It is here that we see the conflict between the statisticians who pore over their charts and the fundamentalists digging out every bit of relevant news and attempting to forecast the influences that will affect their favourite stock picks.

In the last year we have read and, on occasion agreed, that the gold price follows the oil price action, the US dollar action, Chinese interest, troubles in South Africa and now currently the Euro`s performance is being quoted as the catalyst.

It should go, without saying, that every one of these factors, plus others, must be taken into account by speculators in precious metals in the fundamental camp, and there we must acknowledge that we have no point of view we wish to bring to the attention of our reader for fear of leading them astray.

At the same time there is no denying the enormous influence that those who by reading the runes by analyzing the multitude of statistical formulas that have evolved can shift markets contrary to the conclusions drawn by the fundamentalists.
Actually it is more the simple fact of a stock or sector price crossing over the 200 moving average that more often than not results in a change in trend.

Short term investors in any stock or sector should always bear in mind that many major funds operate an automatic trigger to sell or buy if their computer signals that their chosen statistical criteria have been achieved. Common sense is not a consideration!

Where does that leave us precious metal buffs?

Well in short wishing we had more funds to buy up gold and, particularly at the moment, silver, while prices are down and tuck them away with the rest of our hoard for that eventual rainy day. Even if prices have further to fall, then of course we will be kicking ourselves for jumping in to early. Hindsight is a wonderful thing but even if silver and gold drop another 10% or more we will not have any sleepless nights.

If you go along with our school of thought, the gold/silver ratio is approaching 70, when historically it is below 60 and in recent weeks has been hovering around the 62-66 mark. If gold goes back up then silver is likely to more or less double the rise in percentage terms, down and the percentage loss will also double.

Our current favourite play is call options in SLV, the silver ETF quoted on the NYSE. The July $18 call  is around $0.85 bid and the July $20 call is around $0.60,  interestingly the prices hardly moved when the SLV share price took a hit last week plus, and most encouraging, there was a large show of call interest at both levels.

This is an example of two of the opportunities in option dealing. Keep to low price options to limit losses, and give opportunity to very significant profits if breaking news or an unexpected event ups the stock price while always bearing in mind time decay.

Whether considering buying or selling an option it is not a bad move to follow the herd, meaning if there is a lot of activity in the direction you are interested in, then there is a reasonable chance that amongst those there are buyers or sellers that may “know something”.

However if they are wrong they will be bailing out pretty damn quick so you would be very unwise to tuck an option away and forget about it. Watching the moves in option trading is essential.

In conclusion we feel that it is possible that gold and silver may not yet have bottomed in the short term although we will not bet on it. In the long term we are remain very confident that these metals will prove their worth as stores of value and hedges against the forthcoming tsunami of inflation. For the medium term, 3-9 months we are confining our activity to playing call, perhaps even covered call options and, hopefully not puts, in the silver ETF SLV.

For our followers not trading in the US there are gold, silver, and PGM ETFs traded on most of the principal stock exchanges around the globe.

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Category: Gold

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