The Goldwatcher

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

TO BUY THE GOLDWATCHER CLICK HERE:

Motivation, Timing & Strategy:

Gold has again breached the ‘magical $1000 threshold.’ Some see this as a sign of yet higher prices to come. Others see it as another overshoot. What should investors do?

The importance of motivation, timing and strategy is emphasised in The Goldwatcher. If the motivation for holding gold is to hedge against financial, currency and security upsets current strong prices reflect the value of the holding as part of a risk protection strategy.  It’s another story if the motivation is speculative. 

The $1000 Threshold:

This comment is from a January 2009 Goldwatcher posting reviewing annual price forecasts by leading analysts:   

‘The 25 industry analysts contributing to the 2009 London Bullion Market Association survey are upbeat - but not euphoric.  Last year the most bullish among them forecast that gold would pass $1000 - which it did for  few days in March. This year, 75% of forecasters expect gold to hit record highs again, with a predicted average high of $1073.54 and overall average of $862. However, as in 2008, prices are also expected to  reach an average low of $721.46.

For gold to rise significantly there must be a catalyst.  In the previous posting on ‘Gold, Red Ink and Animal Spirits’  price is discussed in some detail.  The posting includes analysis from Goldman Sachs on price prospects and analysis on gold and deflation. This is the key comment on gold and deflation :

‘Characteristic of most deflationary periods are deteriorating credit quality and  the shift by investors from capital growth to capital preservation.  Deflations typically end after crisis conditions force policymakers to enact large-scale inflationary policies designed to counteract deflationary conditions.’

Without a catalyst high gold prices are likely to reflect a price  overshoot - overshoots and undershoots are both par for the course in currency and commodity markets.

The $

It will be a whole new ballpark for gold if central banks are buying instead of selling . A comment in The Telegraph ‘ yesterday ‘China, Bernanke and The Price of Gold’  by the astute commentator Ambrose Evans- Pritchard reviews evidence of China switching some $ reserves to gold and the prospect of Sovereign Wealth Funds holding more gold - a subject addressed in The Goldwatcher.

A recent study Is The World Losing Faith in the Dollar? published by Wharton University  opens with the comment : ’ As the global economy appears headed toward recovery, concerns are growing that the United States’ addiction to massive fiscal stimulus as an economic panacea could eventually lead to an even bigger crisis — a loss of confidence in the U.S. dollar.’

Pakistan & Afghanistan:

The following chart illustrates ‘Pashtunistan’ - the porous Afghanistan Pakistan border regions populated by  Pashtuns from Afghanistan and Pakistan :

Other factors  driving high gold prices are the Iraq and Afghanistan debacles and the realisation of an economic Jihad being waged against the West. The June 21st 2009 Gold Watcher posting Economic Jihad : How vulnerable is the $? discussed this development. 

A June 2007  Goldwatcher posting ‘Between Iraq and Another Hard Place’ addressed menacing developments foreshadowed in The Goldwatcher Chapter on ‘The Economic Consequences of 9/11 and George W. Bush.’

A soaring gold price will be sustainable only with  grass roots supply and demand support and investors must take into account that at current prices bedrock demand for phyical gold for jewellery from India has slumped.   The Goldwatcher provides a framework for fundamental analysis but does not address the technical analysis speculaltors take into account. 

The Gold Price and Fair Value 

Current prices certainly confirm the value of gold as an asset with a risk reward profile different to other financial assets. Loking beyond considerations based on fair value  Goldman Sachs analysts noted in a recent report   ’…‘just like crude oil in mid-2008, if enough people worry about the dollar and inflation, momentum can carry gold to much higher levels beyond any measure of fair value.’ 

It will be surprising if the gold price doesn’t settle down above fair value when people factor in the Afghanistan debacle and its potential effects on Pakistan, an economic basket case and a failed nuclear state.

+ Note added 9th December 2009 : New York Times Article on The War in Pashtunistan