Why I Want to Identify Gold Peaks?
I have always been a fan of gold jewellery and started buying Gold since late 90’s whenever I had a bit of extra savings. In mid 2008, when I first got interested in learning about stock market I read articles about investing in gold and mining sector. When I started investing in stocks, I had very little knowledge about stock market. The only thing I noticed was that stocks were getting cheaper, so I started buying stocks of mid-cap companies in the precious metal and energy sector. In 2008, I also bought some physical gold and precious metals mutual funds in order to diversify my investments.
My timing to enter the stock market wasn’t correct, very soon stocks started their free fall on September 29th, 2008. The Dow fell 777.68 points in intra-day trading and lost $1.2 trillion in market value. That was the largest point drop in any single day in history because the US Congress rejected the government’s $700 billion bank bailout bill because of the the stock market crash in 2008-2009. I, like other new and inexperienced investors got panicked and sold my good stocks at loss.
On top of that, one of my family friends, after knowing that I am interested in stock trading, started giving his recommendations of penny stocks. The list of penny stocks I received were looking very cheap during the stock market crash. The mistake I made was buying those stocks without doing any research about the companies.
All my stock investments during the last quarter of 2008 and whole 2009 basically disappeared, i.e. lost 93% of the actual investment. Several companies in my portfolio got bankrupted. I completely stopped looking at stock market and any investment website for two and half years because of the fear of losing more money and the need to focus on other important things in life. During this period gold its all time high of $1911.59. I missed the opportunity of selling my few gold coins that I bought in Nov 2008 for $790 per ounce.
I started doing stock market research again in 2013 but this time I focused on good companies with good balance sheet. I found some good but risky gold stocks that I slowly accumulated over time. Even thought the gold stocks have been falling from their peak in 2012 to the recent bottoms in late 2015 and early 2016, I didn’t end up losing a lot because I have been averaging down my favourite stocks.
Now that precious metal sector has been rallying since February 2016, I want to identify gold peaks. The reason is that I don’t want to sell my stocks too early and regret for another ten years.
How to Identify Gold Peaks?
The key to being a successful gold investor is to understand the gold market trend and buy/sell gold stocks at the right time i.e. BUY low and SELL high. It’s easy to say but hard to implement because timing the market is very difficult. There is lot of noise in the market that makes it hard for a newbie or average investor to decide: “Should I Buy or Sell Gold Stocks?”
My major interest since 2008 has been in the gold and gold mining stocks. I have learned over time that when gold bull starts, the price of gold and gold mining stocks rises sharply. I have been looking forward to another gold bull run like 2009 to 2011 where gold reached from its bottom price of $700 to the all time high of $1911.59 around September 3-9, 2011. Unfortunately at that time I wasn’t able to take profit as I wasn’t following the market at all. Since 2011 gold kept declining and finally reached the price of $1046.25 on December 3rd, 2015.
Gold climbed again to its recent peak of $1306 achieved on May 6, 2016 and gained about 25% in a short time, gold stocks have risen by 100%-300%. This sharp gain in price have made people think if they should sell their existing holdings or buy more on dips. The current Gold bull market has given up 6% of its gain. Now the question is, how long this correction phase is going to last and how much still has to be lost in gold and gold stocks. Also, it is important to know if the recent upward move in the gold price was a significant top or not.
I have been observing gold market patterns for about eight years and have studied lots of articles about gold trends. There are several resources/articles that have helped me to decide if I should Buy or Sell gold mining stocks at a particular time. I believe that long term gold price will increase a lot as we still haven’t seen the significant top in gold price based on various methods discussed below.
In the article A Blow-Off Top For Gold Lies Ahead the author mentions about Google trend as an indicator to locate gold top:
Gold appears to have more room to run because Google trends is not showing a surge in “buy gold” even as trading activity takes on new extremes.
Correlation between Oil and Gold Price
As mentioned in the article “The Price Of Oil Is Rising? Gold Is Next“:
There is a connection between the oil and gold markets which has created the perfect opportunity to profit from the oil reversal. According to a 2011 study, oil can help to predict the future price of gold for up to 3 months into the future.
So, as the price of oil fluctuates, our economies can be seriously affected. Specifically, rising or falling oil prices can lead to stronger or weaker inflation throughout.
Gold, though, is often considered an “inflation-hedge;” it retains its inflation-adjusted value. So, when prices rise or fall, as they may from changing oil prices, the price of gold also tends to rise or fall. When oil prices change, the effects on inflation also tend to cause the price of gold to change. Further, the effect is delayed just as inflation lags behind the price of oil.
This predictive power of oil prices over gold prices is effective up to 2-3 months into the future. However, the predictive power weakens throughout this time, until the 2-3 month horizon where it is no longer effective.
Luckily, the price of oil has been skyrocketing over the last month. We still have plenty of time to get in on the action. Of course, if oil prices fall from here, that would be a negative for gold prices. Given the dramatic rise in oil, though, I think it is safe to say the price of gold should rise even if oil falls back a little from here.
Assuming that the price of oil doesn’t change drastically in the next few months, I would expect the price of gold to be in an uptrend at least until the end of June.
GLD Inflow/Outflow vs GLD Price
In the article Gold Market – Play It Like Jesse Livermore the author uses the data delivered by the SPDR Gold Trust ETF (NYSEARCA:GLD). Although some people say that GLD is not a reliable indicator, in his opinion, it provides very interesting data. The chart below shows the GLD cumulative inflows/outflows, starting from 2004:
Source: Simple Digressions
Generally, any bull market in gold is supported by a rising difference between gold inflows and outflows (GLD is a net buyer of gold). And vice versa, any bear market is supported by a lowering difference between gold inflows and outflows (GLD is a net seller of gold).
What is interesting, the topping process (or, using other wording, distribution phase) is indicated by the relatively stable difference between inflows and outflows (no changes in gold holdings). The yellow area shows this period. Between June 2010 and December 2012, no “fresh” gold was entering GLD. Another interesting observation – during this distribution phase, between June 2010 and August 2011, gold prices were still going up. Investors tracking the data delivered by GLD could very easily spot a topping pattern in gold.
However, this market is very tricky because nothing similar indicates the beginning of a bull market phase. During the previous gold rush (which started in 2001), no easily identifiable accumulation phase was present. To be honest, there is too less GLD data to deliver a decent study on this issue (GLD is quite a new investment vehicle). However, it looks like the gold market enters its bull phases usually without any accumulation periods. Therefore, it is very hard to call a bottom in gold.
So, how to play this market? My answer is simple – look at the gold market as a real-time experiment (using the term introduced by George Soros in his book “The Alchemy of Finance”).
If your assumption is that gold is still in its bear market – stay out. If your assumption is that gold has started its new bull market phase – get in.
Gold’s Historical Yearly Patterns
According to Gold Takes A Breather… Is This The Buying Opportunity Investors Are Looking For? (May 24th, 2016) regardless of Gold being a bull or bear market, there are still fairly predictable intra-year trends in the price of gold. Below is an updated composite chart of the metal’s historical yearly patterns over the last five, 15 and 30 years, courtesy of Moore Research.
In all periods, gold contracted in May to early summer, then rallied in anticipation of Ramadan, India’s festival of lights and wedding season. This means we should not be surprised if gold miners continue to drop for another month. These fluctuations are the nature of the markets.
In Gold Stock Pullback Is Imminent – Don’t Get Shaken Out! the author/s plotted three of the most recent gold equities bull markets on one chart (one year out), and it appears that the current recovery is overbought and due for a correction.
It appears that both of the previous corrections occurred four months after the initial run-up; in 2008 the Gold BUGS Index lost 20%, while in almost the same time span, the 2000 gold bull lost 18%. This means that there is a possibility of further 14% decline in Gold price.
I think gold is likely to find support around $1,175 to $1,200 and silver around $15.50 to $16. This would be a 50% retracement of the advance from their late 2015 lows. Gold has more immediate support around $1,206, which was prior support and also the Fibonacci 38.2% retracement level. The RSI is pointed lower and still has a bit of room to drop, so I suspect we will see gold retreat to somewhere in between $1,175 and $1,206.
Billionaire Contrarian Investors
Recently the mainstream media has reported that several billionaires are concerned about global financial markets and have purchased significant amounts of gold to protect their portfolios. According to Gold Takes A Breather… Is This The Buying Opportunity Investors Are Looking For? (May 24th, 2016)
First it was Stan Druckenmiller, now it’s George Soros. Following billionaire former hedge fund manager Druckenmiller’s announcement that gold was his family office fund’s largest currency allocation billionaire investor George Soros, Druckenmiller’s old boss, purchased a $264 million stake in Barrick Gold (NYSE:ABX), the world’s largest gold producer, after liquidating $3.5 billion in U.S.-listed stocks. Additionally, he disclosed owning call options on a gold ETF.
Then there’s John Paulson, the CEO of Paulson & Co. which manages over $18 billion in assets invested in credit default swaps. The company has made about $15 billion in profits by betting against subprime mortgages. In 2015, Paulson invested about $900 million in gold at close to what now appears to have been the bottom of the three-year correction. He believes gold has a place in portfolios as insurance against the unexpected. He views gold as a currency, not a commodity.
Based on the historic and cyclical gold market trends, I am quite convinced that it is the right time to maximize my investments in gold sector and take advantage of any pullbacks to add value stocks to my precious metal and gold mining stock portfolio.
Based on various metrics including Google trends, GLD Inflow/Outflow to GLD Price ratio, Correlation between Oil and Gold Price and technical analysis it seems that gold has a lot of upside potential and may reach $2000+ an ounce in the next few years.
Mining stocks are, a leveraged play on gold. Market Vector Gold Miner index (GDX) has almost doubled to 26.17 from its recent bottom of 12.39. In the last bull market from 2008 to 2011 GDX gained about 300% from 15.82 to 66.98 with several small corrections ranging from 12% to 22%.
Some people are recommending to take profit on GDX e.g. Time To Take Profits On GDX whereas other long term investors still want to hold their positions arguing that reward of holding the gold mining stocks or gold is much higher than being out of the trade to protect against a further 14% decline.