Trick or treat: Why you shouldn’t sell gold

Don't cash out just yet as the proverbial golden era for the yellow metal may have just begin, reckon experts

Fact: Gold price has more than doubled in the past two years.

Fact: The Dubai Financial Market and the Abu Dhabi Exchange have decline 40 and 17 per cent, respectively, during that time.

Fact: What goes up, comes down. And vice-versa.

That’s a lot of facts already, but one that a gold investor must consider is this: The previous gold high in 1980 of $850/oz is worth over $2,000 in 2010 dollars once adjusted for inflation.

Having reached an all-time high of $1,387.35 an ounce this month (October), the yellow metal has lost some of its gains and is now trading around $1,360/oz levels. Is this is a signal that gold is set to reverse the gains of the past two years? Not by a long margin, experts tell Emirates 24|7, who believe that gold still has a lot of steam left in it and there’s still time before this asset class sees any realistic correction.

“Looking at long-term charts, we can clearly see the uptrend in gold,” affirms Zeki Muderrisoglu, fund manager & senior technical analyst, Asset Management Group at National Bank of Abu Dhabi (NBAD).

“If we analyse previous corrections [in gold price], we notice that there were around 22 months between peaks. Adding this to the last peak gives us some time around October 2011 as the next possible peak date according to cycle analysis,” Muderrisoglu told this website.

“Gold is still up more than 20 per cent this year – outpacing equities, bonds, real estate and most other commodities, and, almost certainly, it will rack up its tenth consecutive annual gain,” said Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital.

“After the meteoric rise in the past couple of months, a rise that has seen gold achieve new historic highs, it is not surprising to see a modest correction,” he said, adding that analysts “have consistently warned investors to expect great volatility – both up and down as the yellow metal continues its long-term advance to new record-high prices” contributing to the recovery in the price of gold.

“In recent years, there have been only three major corrections of the uptrend. First correction started on May 2006 from $730 to $540, losing 26 per cent of its value. Second correction started on March 2008 from $1,030 to $680, losing 34 per cent of its value, and third correction started on December 2009 from $1,230 to $1,040, losing 15 per cent of its value,” NBAD’s Muderrisoglu detailed for Emirates 24|7.
In comparison, let’s look at what happened to gold price this October. It reached an all-time high of $1,387.35 in mid-October and then fell to a little over than $1,300 in the last week, but this only represented a loss of little more than 4 per cent during the said time’s peak-to-trough.

“Markets can stay irrational for extended periods and we are talking about the long-term here. In the current case, indicators, although stretched, have not yet reached their previous extreme highs (that we saw in previous peaks) so there might be some more room to go up further. Moreover, there is no reversal signal at the moment from lower time frames (i.e. medium-run and short-run) indicating a correction,” Muderrisoglu added.

“Looking beneath the surface at recent market intelligence suggests that downside risks are limited while key market fundamentals suggest upside potential remains great. Indeed, even if the recent downtrend continues, my confidence in the metal's bright future remains strong. The bullish case for gold not only remains intact – but looks increasingly more powerful,” Nichols wrote in his latest column. 

According to M.R. Raghu, Head of Research at Kuwait Financial Centre (Markaz), a weak dollar is supporting the yellow metal and that the run-up cannot be categorised as a bubble, yet.

“As gold inches up, the upward potential will be less and less. However, continuous dollar depreciation lends itself to a strong gold going forward. I feel that you could encounter some serious resistance at $1,500 level,” Raghu told this website.

According to Walter de Wet, commodities analyst at Standard Bank, demand for physical gold has picked up.

“The physical gold market has undergone a marked change in the past week. Until last week, the physical market provided resistance to a higher gold price – now it is providing support.

“We have seen strong physical selling and scrap gold coming to market since mid-September, as the gold price pushed higher. However, the latest decline in the gold price to below $1,330 spurred renewed physical buying interest. As a result, our Standard Bank Gold Physical Flow Index (GPFI) has jumped into positive territory after lingering in negative territory for almost more than a month,” he said.

The buying interest is spurred by two events, he explained: “Firstly, ahead of Diwali on November 5th, India buying interest should remain strong on any price dips. This buying on pull-backs in the gold price may fall away after next weekend. Short-term, this warrants some caution.

“Secondly, we believe the buying interest is an indication that the physical gold market is slowly adjusting to the higher gold price and now sees a ‘higher low’ in the gold price as a buying opportunity. Long-term this is a bullish sign.

“We continue to expect gold physical demand to prevail on dips. However, the demand on dips might not be as strong as it has been the past month. While Indian demand may fall away towards mid-November, we still have the festive season in the Western Hemisphere as well as Chinese New Year. In 2011, Chinese New Year is on February 3rd,” he added.

For investors, the NBAD expert has a word: “For those who do not have positions, with a long-term view, it is quite risky to open one before the correction as it is already overbought. For those who already have positions, with a medium/short term opportunistic view, wait for a reversal in lower time frames to book profits; to sell high and buy at a lower price. For those who already have positions, with a long term view, hold the long positions until there is a reversal in the long-term charts.”


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