January 29, 2011

More On Gold

The World Gold Council recently issued its Gold Investment Digest for 2010 which provides, among many other interesting data points, a listing of official gold holdings of various countries. Notable highlight in our chart is the fact that the ETF GLD has been the 6th largest holder of gold at the end of 2010 (in case you were wondering what has been driving the price of gold in recent years).


Gold continues to fascinate although it has been under pressure since the beginning of 2011. The precious metal has gained in investor acceptance and many advisors have been advocating to include a (small) percentage of gold as part of a well-diversified portfolio.  That in turn has led speculators to continue to invest in gold based exchange traded funds such as GLD (chart above). There are other gold funds though all seeking to share the gain on this unprecedented gold bull run.  How much of a speculative element there is remains to be seen but there sure are plenty of funds trying to imitate the precious metal’s return.


The growth of the exchange traded funds and their immense appetite for investments in the asset have led to a dramatic shift in demand from industrial and jewelry demand to investment demand. Overall, the demand for gold has declined since 2000 while the supply of gold saw an increase of over 400 metric tons between 2008 and 2009.  From that perspective, the recent pull-back from the record highs since late last year makes fundamental sense.

Source: World Gold Council

We also examined the price of gold versus the Australian Dollar last week.  That trading pair has now been trying to pierce through the lower trendline of this triangle pattern.


In case you are considering such a trade, keep an eye on the developments in the coming week(s) to see whether this turns into an actual sell signal. In terms of the gold price patterns, we have seen an interesting development with the Gold/Silver Ratio.  The ratio which is a straight division of the gold price and the silver price, has seen a dramatic decline in the second half of 2010 when the ratio dropped significantly below its longer-term moving average (red line) which has been around 60.


Intuitively, investors knew that the price of silver appreciated much faster than that of gold.  It does however sink in much more when observing the drop in the ratio on a chart. From a technical perspective, one could now see a retracement of the ratio back to somewhere around 55, perhaps even 60. The Fibonacci retracement levels are in that range as well.


To reflect this scenario, an investor would have to buy gold and sell silver in equal dollar values.  Not an easy and certainly not a risk-free trade to put on.  Having said that, it might be less risky than a straightforward purchase of gold, certainly that of gold futures.  As with anything, do your homework and buyer beware.

Good luck and good investing!

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