Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20
Silver's Massive Undervaluation Relative to Gold Makes It Irresistible - 14th May 20
Bitcoin Halving Passes with no Fanfare, but Smart Money is Accumulating - 14th May 20
Will Job Market from Hell Support Gold? - 14th May 20
The Tragedy Of Missed Covid-19 Opportunities - 14th May 20
Worst Jobs Report In US Economic History - And The Stock Market Continues To Rally - 14th May 20
NASDAQ Sets Up A Massive Head and Shoulders Pattern - 14th May 20
Perceiving Coronavirus as a Disruptive Technology - 13th May 20
Why Financial Trouble Brews on the "Home" Front - 13th May 20
Stock Market ‘Sentiment Event’ Rally Grinds On - 13th May 20
The Fed Now Owns All Markets - 13th May 20
Fruit Trees Gardening to Beat Coronavirus Blues - , Apple, Cherry, Kiwi, Pears, Plums, Grapes, Bananas May 2020 - 13th May 20
Gold Investors Shouldn’t Be Losing Focus - 12th May 20
S&P 500 Bulls Again At Resistance – Now What - 12th May 20
US Fourth Turning Accelerating Towards Debt Climax - 12th May 20
Gold in the year of the Coronavirus Pandemic - 12th May 20
Hi Ho Silver : Away! - 11th May 20
The Great Stock Market Disconnect - 11th May 20
The Big Move In Silver May Be Right Now - 11th May 20
Finding Winners in the Wreckage of the Coronavirus Economic Downturn - 11th May 20
Brave New Corona World – A heated Debate between Steven Pinker and Aldous Huxley - 11th May 20
Coronavirus Catastrophe Stock Market Implications - 10th May 20
US Stock Prices are Ignoring the Economic Meltdown, Wait for it… - 10th May 20
Forecasting Crude Oil: This Method Has Been the Undefeated Champion Since 1998 - 10th May 20
Coronapocalypse and Gold - How High Is Too High for the Yellow Metal? - 10th May 20
The Illusion of Owning Gold - 10th May 20 - Nick_Barisheff
The Financial Crisis Will Continue To Lurk Even If the Lockdown Gets Eased - 10th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Incompetent Central Banks Gold Invest by Selling Low and Buying High

Commodities / Gold & Silver 2009 Nov 09, 2009 - 07:07 PM GMT

By: Ned_W_Schmidt

Commodities

Best Financial Markets Analysis ArticleWow, the light bulb finally went on last week. Perhaps we have never truly understood investing. Bank of England in the 1990s was selling Gold as it plunged to below $300. Now, with Gold soaring above US$1,000, the Reserve Bank of India is buying. The trick is to apparently sell low and buy high. We always thought it went the other way. But we do note a distinct difference in this pattern from buying high and then selling low. If only central bankers had revealed this secret of high level investing earlier, how much happier we all would have been.


We then learned on Friday that the central bank of Sri Lanka had been buying Gold.

"We have been observing that prices of gold have been going up so we have been strategically buying gold over the past several months as part of a reserve management process of diversifying our portfolio,' he(Central Bank assistant governor Nandalal Weerasing) said.(thepensinsulaqatar.com, 8 November 2009)"

That buying because the price was going up sounds a lot like momentum investing. Buying something because it is going up is good way to end up owning something when it goes down. Will the central bank of Sri Lanka be selling when the momentum is negative? Or, will Gold then be a long-term holding being held for diversification purposes and price recovery? Never have been nervous about a positive view on $Gold till last week.

In our first chart this week is plotted the six-month rate of change on $Gold using the green line, and the left axis. The red line is the inflationary component of U.S. money supply growth. It uses the right axis. We assume that the price of $Gold is somehow influenced by the inflationary growth of the money supply.

As can be observed in that chart, those lines seem to move somewhat together. When U.S. money supply growth is highly inflationary, the return on $Gold seems to rise. When the inflationary component of U.S. money supply growth is declining or negative, the return on $Gold weakens or declines. Those buy signals on $Gold's return are created when the money supply measure turns positive from a negative reading. We note that those buy signals seem to offer good guidance.

Let us consider the more recent experience in that graph. First, we observe the large upward spike in the inflationary component of U.S. money supply growth. That occurred as a result of the massive injection of funds into the U.S. financial system by the Federal Reserve. That aggressive easing did raise the return on holding $Gold.

However, the most recent period is producing some troublesome divergence. The measure of the inflationary component of U.S. money supply growth continues in negative territory. At the same time the return on $Gold has been rising due to the entry of so much momentum driven money into the Gold market. Hedge funds that would not touch Gold at "$400," now love it.

Based on the data presented in that chart, an expectation that the return on $Gold will decline is reasonable. Does that negate the long-term bullish case for Gold? No. What it means is that the long-term is composed of multiple short-terms, some of which we may not enjoy. Note, though, that the money supply measure does seem to be bottoming. It should turn up in the months ahead as the Federal Reserve continues its reckless policies. On balance, the return on $Gold should moderate, and then again turn positive sometime in the coming year.

Our second chart, above, plots the GDM, the Gold Miners Index. That is the index of Gold stocks used as the investment model for the GDX, the Market Vector Gold Miners ETF. The picture presented is worrisome. The GDM has failed to confirm the recent action in $Gold. As stocks discount the future, the GDM may be telling us that today's high price for $Gold may not persist into the immediate future.

We also wonder if a head and shoulders pattern might not be developing. We have drawn into the chart a possible neck line. Any move down through that possible neck line would be worrisome, and suggest further weakness in the stocks and likely in Gold. We note, also, that a similar worrisome picture exists in Silver. Why has Silver not followed Gold higher?

While remaining a committed long-term Bull on $Gold, that no asset price moves in a straight line must be acknowledged. A short-term period of weakness in $Gold seems increasingly likely. Should that happen, U.S. dollar-based investors should use those lower prices to add to positions.

Investors in other currencies will likely have different experiences. For example, EU€Gold has finally escaped the long lateral pattern in which it had been trapped. That action suggests that €700 is the new floor for Euro-based investors. While over bought short-term, EU investors should add to positions on any price weakness, and prepare themselves for higher Gold price. The Canadian $Gold situation is more like that of $Gold. A sharp break may be necessary to shed the accumulated over bought condition. Should that break occur, Canadian investors should add to their Gold holdings.

By Ned W Schmidt CFA, CEBS

Copyright © 2009 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_GETVVGR.html

Ned W Schmidt Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules