FYI | Oct 24 2007
Gary D. Halbert, president/CEO of ProFutures and editor of E-zine InvestorsInsight, this week joined the queue of market experts who decided it’s time to step out of the booming gold market.
Under the eye catching title of “Why I am taking profits in gold now” Halbert explains he’s still bullish on gold, as are all other experts who stepped out earlier, but the current market situation wherein everybody –and that is EVERYBODY- is bullish gold, and bearish the US dollar, simply makes him uncomfortable.
I am a bit of a contrarian, Halbert confesses, so when everybody seems to move into one direction he doesn’t see much benefit in walking along the same path. That seems like a very lousy reason to abandon the market, especially since he’s of the view there’s still upside potential left for the precious metal.
However, having first handedly experienced the peak, and subsequent retreat, of spot gold and silver prices in 1980, Halbert knows all too well the price of gold doesn’t trend sideways. If gold comes down it comes down like a dead body falling off a cliff. Just like it did in 1980. And Halbert simply doesn’t want to be around if and when it happens again.
Back then he sold out comfortably ahead of what would prove to be gold’s ultimate price peak – so far, of course. Depending on the accuracy of his memory, Halbert recalls in this week’s newsletter he advised his clientele at the time to sell out at around US$650 per ounce for gold and at around US$35 per ounce for silver. For a brief time that looked like a not so smart decision as gold would surge, and surge, and surge further until it reached US$850 (and silver US$50) – but after that it quickly went downhill.
And quickly it went. Less than a month later silver was trading below US$17/oz and gold? At US$500/oz.
As you would expect, investors lost fortunes and rumours would swirl around in the market for months that this broker and that institution were in serious trouble.
There’s an old saying Halbert carries with him since his early days in the futures trading market. It saved him back then and he suggests it is going to save him again this time around: “’There’s some for the bulls, some for the bears, but there’s none for the hogs”.
He cites a few factors that make him cautious this time around. The most obvious one is, as you would expect, that the rise to the current price level has been so steep. Gold prices in US dollars have tripled since the low around US$255 in 1999, Halbert reminds us. But equally important is that the spike up in prices since late August has the price up from US$650 to US$760 per ounce.
That, he says, suggests the market is ripe for a pullback at any time. In addition, Halbert believes gold has heavy overhead resistance (which is a technical term for stating “selling pressure”) from US$750 to US$850.
What this suggests is that once the metal surges past US$750 per ounce, anything can happen. The most obvious danger would be a resurgent US dollar. Right now everyone is bearish the US dollar and many an experts will tell you the future holds more weakness for the greenback as long as the Federal Reserve remains in rate cutting mode. This is expected to remain the dominant theme for at least the next twelve months. So why being concerned?
Because the US dollar has already weakened a lot. At some point the currency is bound to regain strength, even if it’s only temporary, and gold is likely to be among the prime victims.
Remember Halbert’s experience in 1980: if the metal comes down, it falls like a dead body off a cliff, not via gentle sideways moves.
It happened in 2006 too.
US based trading guru Dennis Gartman, who sold half of his gold exposure last week on more or less similar principles as Halbert’s, reported overnight that while the US dollar managed to put in something of a brief bounce back, spot gold equally managed to hold its ground.
Gartman suggests this may well have been linked to some very bullish news coming from China. Apparently The China Daily, better known as the unofficial organ of the Chinese Communist Party, reported that China is expected to increase its imports of gold
materially both this year and next. The newspaper quotes a Mr. Zhang Weixing, supposed “industry expert,” as stating at a gold conference in Beijing over this past weekend that “It is possible more gold will be imported from overseas.”
According to Mr. Zhang, the public’s gold reserve is now 4,000 tons, while reserves at People’s Bank of China are approximately 600 tons. He also noted that the “average gold consumption in China is still much lower than international levels,… consumption has increased from 0.16 grams in 2002 to the current 0.35 grams.” In other words, says Gartman, it has doubled in five years.
This week also saw GSJB Were increasing its gold peak price forecast to US$900 over the next 18 months. This would suggest a lot of upside still from the current price levels.
Analysts at BCA Research too believe the outlook remains for a further weakening US dollar and similarly for a further strengthening gold price. The trade-weighted US dollar has now depreciated 25% since 2002, but global forces remain in place to keep the downward pressure on the currency, BCA believes.
Despite the overall view that the whole market seems to be leaning towards this scenario, BCA relies on its in-house market indicators to state that the trend has yet to accelerate, or reach the market mania stage. In fact, says BCA, the currency is not even one standard deviation from the trend since 2002, suggesting there should be a lot more coming still.
The highly respected market researchers didn’t give a target for gold as such, apart from stating the market momentum behind gold’s rise continues to be strong and further price rises should continue.
But maybe the most interesting part of BCA’s analysis is the anticipation that a slowing US housing sector will act reflationary (in other words: it will force the Federal Reserve to cut interest rates in order to keep the economy in positive growth territory) and this will increase investors risk appetite. This should be a negative for the greenback, hence a positive for gold.
Maybe that sums it up quite nicely: as long as global risk appetite remains high, gold should be thriving over the next 18 months. But watch out for those intermediate pull backs, and for a change in overall risk sentiment, of course.
Till next week!
Your editor,
Rudi Filapek-Vandyck
(As always supported by the Fabulous Team of Greg, Grahame, Chris, Terry, Joyce, George and Pat).
