Thomas tan Thomas Tan submits: In several future blogs, I would like to
discuss my thoughts on gold's long-term target and its fundamentals
and technicals. There is no lack of such views from many resource and
precious metal websites, and I have learned a lot from the authors and
feedback from viewers there.
I am not considered myself a so-called gold bug, neither a gold expert
but merely to share my views here since I am putting money to where my
mouth is as shown in my portfolio. I started trading gold, precious
metals [PM] and mining sector since 2003, about 2 years late to the
party after gold bottomed in 2001. Unlike diehard gold bug, I expect I
will also leave the party early, unable to catch either the bottom
(back in 2001) or the top (who knows when?) in the future. However, I
feel PM and mining companies will offer a great investment opportunity
in next several years.
I didn't pay much attention to the gold market until 2003, which is
both good and bad. The bad is that I missed the 2 year spectacular run
on the PM and mining stocks (didn't miss much upside on gold). The
good is that I avoided the nerving wrecking bottom testing of $250 in
both 1999 and 2001 (just like what happened to the equity market right
now). During that time, there was serious concern that gold would lose
its shine and its function as money preservation asset by both the
central banks [CB] and public. However, the $250 bottom held twice and
became the turning point from bear to bull market, and by 2003, an
uptrend was pretty obvious. Again when people were saying ?this time
is different? for gold in 1999 to 2001, gold survived again as it has
been many times in the history of past thousands of years, acting as
the last currency standing in the World.
Before I discuss more fundamentals and technicals about gold, let me
first comment on the consolidation as of today which has disappointed
many PM investors, especially during the market turmoil such as now.
As we know, gold peaked back in May 8th 2006, and it has gone through
a long consolidation phase for 15 months now. This process is long,
but there are several things we should also keep in mind here.
First of all, if you look at the gold (or HUI) chart since last May,
there have been two bottoms, the 2nd one happened in last October. So
even lack of spectacular up move, gold has been on an uptrend since
last October (at least for now if gold doesn't drop below $560 and HUI
below $270). This uptrend is hardly noticeable since it is almost flat
with a slight upward skew, but the same thing happened during
2004-2005 period too when gold tried to overcome the key resistance of
$450. If we use last October bottom for gold & HUI, the correction
period is actually very short, only 5 months (from last June to last
October).
Secondly, if you look at the past 7 years of gold bull market, there
have been 3 major resistances: $325, $450 and $700. Each barrier has
taken a long time for gold to break, e.g. it took 20 months for gold
to break $450 key barrier.
Third, the previous run from $450 to $730 was too spectacular, too
fast, and the up slope was too steep. This was accomplished in only 7
month time, too short also. With such good run, it is normal for the
market to have a long breath, take its time to build a good foundation
for the next move up. It is the balance and symmetry between price
momentum and time. It is good for the general health of the gold
market.
Lastly and most importantly, if you plot the monthly close chart from
1970s to now, gold has never gone higher than $700. Even gold reached
$887 at intraday basis in 1980, which has never reflected in the
monthly close chart (by the way, the weekly close chart shows gold
below $800 in 1980). The same thing also happened to the $730 price
peaked last May. Both are reflected as $690 resistance in the monthly
close chart. If using monthly chart for long term perspective, gold
has never exceeded and stayed above $700 mark for over a month.
This explains why gold faces such a difficulty to surge decisively
over $700 recently because gold has never done this in its entire
history. Above $700 is an unchartered territory for gold from a long
time perspective. I can imagine that $700 actually provides the
largest obstacle for gold to overcome. It shouldn't be a surprise that
gold spends about the same time now trying to overcome $700 as it did
to $450. We also shouldn't forget that once gold broke $450, we saw an
explosive move to $730, 60% gain (about 40% gain from $325 to $450 at
the previous run). If using the same analogy, we shouldn?t be
surprised to see that once gold breaks $700 decisively on a monthly
chart, gold will have a field day with similar explosive up move to
reach 4 digits.
I have seen this kind of shakeout and bottom testing before, such as
in May 2005 (when gold was above previous bottom but HUI was testing
its old bottom again). This is a typical capitulation to shake out all
the weak apples and hammer out any remaining confidence in investors.
As trading in any market, we need both patience and strong heart,
especially with gold, especially during market turmoil like now.
Also don't forget (if this gives you any confidence) that, we are
holding gold, the last currency standing in the World, and HUI as long
term option to gold never expired and last forever. We are not losing
time value on these gold options and quite opposite we gain time value
since each day the miners especially the juniors are getting one step
closer to production. This is much better than holding some sort of
asset "back" securities marked to black box computer model (not to the
market) with assumptions such as delinquency rate can jump 4 times
from 5% to 20% in one month. We have no clue what the future cash flow
looks like on those ABS products if there is any. But at least we have
gold.
Even with what has happened during last several weeks, I am still
expecting this consolidation phase to end soon, and that 2nd half of
2007 will be a good up market for gold, silver and HUI. Next year in
2008 too. Buying dip and holding have been a good strategy during last
7 years in this gold and mining market, so don't panic. A great
opportunity and turning point might be right in front of us.
BigGains !!
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