Tricky Times Ahead For Gold Investors

December 29, 2011 | By | Reply More

Spot gold has already dropped $45 an oz since trading restarted after the Xmas holiday. Volume is expected to be low as many traders take an extended break until the start of the new year.

However, so far, volume has dropped well below the expected range for the time of the year. This, we feel, is a reflection of the uncertainty that abounds the stock and precious metal markets throughout the world. To say there are tricky times ahead for gold investors is not an understatement.

Falling Gold Imports and New Restrictions

India, the worlds largest purchaser of gold, is in the grip of inflation, the rupee is falling in value and interest rates are rising. The expectation is that 2012 will see a drop of up to 50% in gold imports into India. The China growth engine is showing worrying signs of slowing down while at the same time curbing the activities of gold dealing not authorised by the state, effectively leaving the market confined to the Shanghai Gold and Futures exchanges although how this will work out in practise we are uncertain.

Midway through 2011 the US came up with restrictions on gold trading outside Comex aimed at imposing leverage restrictions.

Euro Crisis Waiting For a Solution

Europe continues to prevaricate as no worthwhile longer term solutions to the Euro crisis have even reached the “lets discuss the idea” stage.

The US continues to produce data that is designed to give confidence to investors but as each set of optimistic figures seems to get revised downward a month later, the only beneficiaries are short term traders who take advantage of ‘mugs money’. We will not go into the immoral pact between government and the banks to fund the banks profits at the expense, but not to the advantage, of the taxpayer.

Panic Sell Button Will Hit Stocks & Commodities

This leaves us with very mixed ideas as to where the price of gold is going in the shorter term. Investor psychology always plays a part in any trading decision, or it should. Right now we think that it even more important as we try to assess what will motivate fund managers and retail investors alike.

Our best guess is that the major players will stick with their computerized trading systems unless, or until, liquidity concerns in falling markets persuade them to press the panic sell button, leaving the retail investor in serious trouble.

China to Buy Gold When Price is Favourable

Such a scenario will undoubtedly drive down precious metals, with gold in the fore front. At the same time there are central banks just waiting for the right price to up their gold reserves and have made no secret of their intentions.

China being the most obvious example, it is the second largest importer of gold and the largest producer but is only over sixtieth in the world at 1.6% of its reserves held in gold. As recently as Tuesday one of its leading officials was reported as stating that the intention was to increase the nations gold assets when the price was favourable.

Gold’s Best Is Yet to Come

Bearing in mind that the many fundamental issues that have prompted our bullish stand on gold are just as relevant now, or even more so, as they have been for the last year or more, we remain confident the the best is yet to come.

Before then we may see gold plummet to $1400 or lower, especially if we have a bout of deflation in which case the effect on gold will be short lived as the essentials to living will hold their price before the inevitable inflationary spiral takes off in a big way.

We Will Stick With Our Gold

At this moment in time our conclusion is not to be tempted to sell our gold stash and to look to buying the dips using longer dated call options in GLD or other gold ETFs in order to spin out our available cash.

As we have little or no idea how much further the gold price will fall, going short or buying puts would be a dangerous play as it is entirely possible that today’s $1560 an oz may be a bottom.

Come what may we will wait till Monday to decide whether to start buying or delay until a clearer picture emerges. As even the most inane utterances of US and European politicians at present seem to result in substantial market moves we are steering clear of technical analysis in supporting our market decisions. Keep your powder dry and have a prosperous new year!

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