Tuesday, April 8, 2008
Technical Analysis Charts are important indicators about future actions, but they aren’t perfect. Whenever unsure about what the market’s technical analysis indicates, exercise extreme caution. Uncertainties can also be addressed by looking at current market news and analyzing the time of a present market trend. A University of Michigan study (http://www.freerepublic.com/focus/f-news/1748325/posts) has shown that most market trends are positive during the period between a new moon and a full moon (waxing period) and most losses are seen thereafter (waning period).
Sunday’s New Moon commenced a new trading trend for the markets on Monday. We all witnessed precious metals/commodities approach the MACD crossover (some mining stocks have already done so) and send bullish reversal signals. Yesterday was unsurprisingly bullish and commodities like oil, hit a record high around $109. Today, the story was different.
Coincidentally, the IMF released news this morning (before the markets opened), of its plan to sell 400 tonnes of gold over several years in order to raise money for its endowment (http://www.miningmx.com/gold_silver/640731.htm). As a result, the markets and commodities experienced profit-taking across the board. Despite the IMF’s actions, gold and silver decreased by less than 0.5% and began to rebound by today’s close.
The news was meant to tame the present upwards thrust in commodities prices. The news shows that the banks will do whatever it takes to scare you out of deciding to own precious metals and to convince you that inflation is not as bad as it seems.
If precious metals owners are weary about the IMF’s actions, just recall the brief history of central bank gold sales. In the 1990s European central banks began massive gold selling as a requirement of the newly formed European Central Bank. What’s most ironic is that these central banks sold most of their gold at a period low. Had they waited until after 2001, they would have been able to sell their gold at much higher prices.
Gold selling helped to keep metals prices low, but did not cause the decline. Technical analysis pointed to a downward trend beforehand; the gold selling only helped to keep prices artificially lower than what they should have been. The proof is that gold sales continue today, but the price of gold is up over 300% since 2001. Furthermore, gold is worth a lot more than its price currently dictates.
About 500 tonnes of gold are already sold annually under the Central Bank Agreement. As you can see from the chart (on the following link: http://news.goldseek.com/GoldForecaster/1178295571.php), most of the central banks that had been selling gold are running out! Belgium, Spain, Switzerland, the UK and the US no longer have gold to sell.
To reiterate, the IMF will be selling a small amount over a large period of time–not nearly enough to cause a major dent in the market. So just consider the IMF the new central bank gold seller, in lieu of all the other central banks that have run out of gold to sell.
Gold is not just a measure of inflation, it’s also a luxury item so it’s important to analyze its increase in demand. New affluent classes in China, India, Russia, and Brazil will boost gold’s demand in the foreseeable future. India, the world’s largest consumer of gold is a little different because even the average Indian thinks very, very highly of gold and will seek to acquire more as they get wealthier. Contrast the average Indian with the average American who actually thinks negatively about gold. Next, you have to factor in all the central banks of the world that aren’t selling, but buying–namely, China, Russia, the United Arab Emirates, and Japan. Finally, you have to consider that less and less gold is being mined each year. Now, China is considered to have the last known major gold deposits left (of course there are other smaller ones scattered about).
In conclusion, don’t worry about the IMF news because technical analysis points to higher gold prices in both the immediate term and long term. Bad news can only influence a trend, but all market forces combined will determine its outcome. If buying gold at this time still makes you feel uncomfortable, then silver is certainly a better option. The IMF and most central banks can’t sell silver because they don’t own any! Right now, the largest amount is held in the precious metals exchanges and the Silver ETF fund. In fact, most investors are clueless about just how little silver there really is.
Unlike gold, silver is widely used as an industrial metal. Such industrial consumption has taken most silver out of the market and has made it rarer than ever. Like gold, silver’s price has been able to remain artificially lower than it should be because manufacturers want to keep the metal at an affordable price. In fact, silver is so undervalued that it’s price ratio to gold is 50:1 instead of the 10:1 natural ratio that has existed throughout human history. Proof that silver is the better investment lies in the fact that its price ratio to gold was 100:1 just a decade ago and that silver has outperformed gold on a yearly basis since then. So consider this a silver investment opportunity.
