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Nothing Sweet About Gold

Commodities / Gold & Silver Jun 12, 2008 - 11:39 AM

By: Nadeem_Walayat

One thing that I have noticed whenever I publish an article on gold that concludes with a bearish outlook, it tends to be followed by an healthy email response usually informing me that I am completely wrong and that gold is destined to travel to the moon. No other market analysis generates such a response. This clearly signals to me that many, many investors are over weighted in the gold and precious metals which in itself is a warning sign of an imminent peak.

One of the keys to successfully investment is not being overweight in a particular stock, sector or commodity group.

Gold itself is not the best performing precious metal, and far from the best performing commodity. So it is puzzling why so many hitch their wagons to an under performing asset? When you have the likes of crude oil that has consistently proved itself to be a more favourable commodity to be invested in for the long-run with so many more liquid vehicles from oil production, exploration and servicing oil companies, funds and ETF's and a multitude of vehicles giving leverage to the actual crude oil price.

Many Investors Definitely Need to Guard Themselves Against Becoming Seduced by Gold!

Yes have gold exposure, but please keep your exposure in perspective since the objective is to allocate ones portfolio for long-term gains whilst controlling risk, thus investors should aim to invest in the strongest sectors, and within the strong sectors in the strongest stocks or funds or commodities. Rather than to become emotionally attached to an under performing component of the precious metals group.

Personally, I would not, and have not committed more than 2% of my stocks portfolio to gold and silver. And the maximum allowable to any group such as commodities is limited to 15%. This is to ensure that emotional attachment does not come into play when analysing the market, i.e. if you have for say 20% of your portfolio in gold, then you will have a tendency to be bias in favour of good news on gold, and have a tendency to ignore bad news, much as tek stock investors experienced during the great dot com boom and subsequent bust, that saw over 90% of wealth evaporate, whilst those with exposure of less than 15% at the dot com peak perhaps knew when to get out and rotate some of their holdings into other sectors much earlier during the bear market that followed, and even if worst came to the worst and they hung on to the bitter end, their portfolio's will not have been devastated by a loss of more than 90% that many have experienced.

So the key to successful long-term investing is to ensure appropriate portfolio diversification across asset classes, which means not to have the degree of exposure where emotions start to play a role in the investment decision process.

As to where gold is headed, my last analysis of 20th April still stands, which is for gold to exhibit a volatile down trend towards the target zone of $800 to $830.

By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

Comments

narco 15 Jun 08, 19:15	Gold I feel you are misrepresenting the role of having gold and silver in your portfolio. It doesn't matter whether gold goes up or down $50 here or there in the next month or two. What matters is that you hold a portion (5% to 10%) of wealth in physical gold or silver, especially now during these financially turbulent times. Gold is a base portfolio hedge that should be kept at home in a safe place. No certificates, no ETFs, no paper promises just the ACTUAL metal itself. You cannot do this with any other commodity and this is what makes it a such a great diversifier. If the international financial / monetary system is facing a 1930's depression or 1970's inflationary event then this is merely a matter of being prudent.
Nadeem_Walayat 19 Jun 08, 05:58	Gold Holding What if gold fell another $300 or 33% ?
narco 12 Jul 08, 07:57	Gold Thoughts? Hi Nadeem What are your current thoughts on gold at this moment given the current economic climate? If Freddie and Fannie Mae are backstopped by the US government, what would this mean for the currency and also for the credit worthiness of the USA? Surely the best thing to posess during these uncertain times is physical gold. I think you may have misled investors a little bit here when they should have been accumulating some gold and silver during the last correction.
Nadeem_Walayat 13 Jul 08, 13:50	Gold Portfolio Weighting Hi My opinion is in favour of portfolio diversification so as to ensure that one is not overcommitted to an asset class which results in emotions guiding decisions rather than technicals. Those with a heavy exposure to any market will not be able to detach themselves when it is time to do so, be it gold or teck stocks in the latter stages of the bull market. and 1 months activity is not a long-term investment. Yes by all means buy and hold gold, but only to the point where it does not blinker your decision making process, in my humble opinion.
David 17 Jul 08, 10:38	Gold Sites Better analysis on the outlook for gold at gold sites such as goldseek.com Dave.
Nadeem_Walayat 17 Jul 08, 11:54	One trick pony Gold Sites. Hi David The problem with sites that focus on one sector of the markets is that they have a vested interest in for example the maintenance of gold bull trend, therefore will have a bias in that favour by ignoring analysis that does not support the case for gold prices to go higher. That is why they missed the peak at 1030 and the subsquent decline to $850. Whilst an unbias site, will give analysis prospectives from BOTH sides therefore giving the reader a fair representation of the actual likely trend without bias or favour for a particular market direction other than which is reflected in the accumulative analysis of posted research / forecasts. Regards NW.
narco 17 Jul 08, 12:00	Gold & silver true alternatives to fiat currencies The point I was trying to say was that gold and silver are the only true alternatives (except maybe real estate)to paper asset classes denominated in fiat currencies. You can hold the wealth itself in your own hands. It is important that people keep a minimum of 5% and maybe a more at this time. Who knows how reckless central banks will be with their currencies now that everyone needs a bail out? Think of it more as an insurance policy rather than a performance asset.

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