Gold Oversold, US Dollar Overbought

By: Mark_OByrne

Comex gold continues to stink up the room after the sharp falls in recent days as the dollar has strengthened considerably and oil prices fallen sharply. The technical damage sustained to Comex gold has been severe and chart watchers are now tentatively looking to support at $750/oz.

Meanwhile the Comex gold price is becoming less important to the setting of the physical gold bullion price internationally as shortages lead to much higher premiums being paid (both by buyers and sellers as retailers and wholesalers desperately try to incentivize sellers to sell to them so as to replenish their depleted inventories).

Comex gold has now given up all of the gains of the last year and is back trading at levels last seen in October 2007. However, gold's safe haven attributes have clearly been seen since the start of the credit crunch with the FTSE and the S&P 500 both down by more than 34% in the period and gold (in dollar terms) up by more than 16% despite considerable dollar strength.

The dollar is now extremely overbought especially given that the debacle on Wall Street is now likely to lead to a sharp recession in the US. The bailout of much of the US banking system and massive money creation is classic debasement of the currency and is very bearish for U.S. bonds and the U.S. dollar.

Despite this, sentiment towards the precious metals on Wall Street and in the media is bearish right now. There is simplistic reporting and constant references to how gold has fallen 25% from its 'peak' and failure to point out however that gold remains up by more than 16% (even in dollar terms) since the start of the credit crisis - unlike the vast majority of asset classes. It is worth remembering that gold was trading at just $650/oz in August 2007 when Bear Stearns collapsed and remains up by more than 115%  (in dollar terms) in the last 5 years.

Gold's performance in euros and pounds has been even more impressive since the start of the credit crisis. Gold prices in pounds have risen from £330/oz to £461/oz for a return of over 39% in the period. Gold prices in euros has risen from €475/oz to €586/oz for a return of more than 23%.

The bearish media reportage and commentary is likely a good contrarian indicator that we are near to a low in this recent correction. However, for those with short term horizons we have constantly cautioned about the risk of "catching a falling knife". Markets tend to 'trend' in any given direction for longer than participants expect. Leveraged speculations are not advised in the current unprecedentedly uncertain environment. Those with long term horizons should continue to take this opportunity to continue to be diversified and keep a healthy allocation to gold bullion.

Those who have diverted savers and investors from making this essential diversification are putting their savings and investments at risk. Some before said that gold was overbought at $1,000/oz and now say that gold will “collapse” to below $700/oz. They will likely be proved very wrong given the confluence of so many bullish supply and demand factors result in gold back at new record highs in the coming months.

The bottom line is that nobody knows the direction of any market in the short term and therefore now more than ever it is essential that investors do not merely pay lip service to diversification. Real diversification involves having an allocation to investment grade gold bullion as owned by the central banks of the world as seen in the Daily Mail article in our news section today – ‘The Big Picture: This vast vault  of gold under the Bank of England should weather the credit crunch' - http://www.dailymail.co.uk/ news...

Rock solid: Several thousand 28lb bars of 24-carat gold stored in the Bank of England's massive underground vault

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

© 2005-2012 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Comments