Tuesday, February 9, 2010

Is this a good time to buy gold?

To be absolutely honest, I haven't the foggiest idea. That is because of my aversion to buying any commodity, including gold. Why?

I remember the good old days of trading at the Calcutta Stock Exchange. During trading hours, the main floor inside the building used to be a scene of complete mayhem. A sea of people shoving and jostling each other while shouting at the top of their voices.

Frequent references and scribbles were made in small chits of paper or notebooks while one or more fingers were frantically waved in the air. How any one could understand what was going on was beyond me.

If that was scary, the scene outside the stock exchange building was almost out of a horror film! Small wooden cubbyholes stacked one on top of the other across the street. Each tiny cubicle inhabited by one human body in a contorted position.

All of them were shouting and gesticulating at a group of people who were assembled on the street. They were also shouting and gesticulating with frenzied abandon. That was the commodities exchange - trading in jute, steel, agri-products and who knows what else!

A couple of days exposure was enough to give any sane person nightmares. To cut a long story short, I have invested in commodity stocks but never directly in a commodity. (Buying jewellery for lady family members does not count!)

So why am I writing about gold? Because it seems to be the latest fad to talk about investing in gold as a hedge against (a) inflation or (b) the falling US Dollar or (c) being overweight in stocks. And when every one is unanimous about buying some thing, I become cautious.

Allocating a small portion of your assets in gold ETFs may not be a bad idea. But huge returns from buying gold at current prices is unlikely to happen. For an explanation, we will need to look at a 2 year gold chart pattern:-


From a low of USD 712.50 per ounce in Nov '08, gold price moved up a huge 70% to a high of USD 1212.50 per ounce a year later. The gold chart could not sustain at the high altitude and has subsequently made a bearish 'lower top lower bottom' pattern.

Recent upward movement has been resisted by the falling 30 day SMA. The 200 day SMA is still rising, giving the gold bulls some hope. But a drop to the USD 900-1000 per ounce zone seems likely. That may provide a better entry point.


Madhu said...

Hi Subhankar,
How ru?
I am commenting on your write up after a long time.
As usual your write up is good.
I would like to reiterate your point on gold.
Gold is an option for hedging and not a good investment proposition.
Also investment in gold does not have any subsequent benefit to the economy or the society.
Investment in shares create new capacities thereby new employment, taxes, development etc.
More over buying gold from neighbourhood jeweller has considerable risk. Hallmarks are still far away from instilling confidence in buyers.
At the same time buying from banks are very costly. Some banks charge as high as 5% - 10% more than the prevailing price.
To sum up, it is very difficult to make significant money from gold investments.
Well jewellery is not included it has more fashion value.

Subhankar said...

Thanks for your comments, Madhu.

It makes more sense to buy gold ETFs than physical gold - considering security, purity and resale issues.

scorpio said...

Gold I was thinking will not move as the countries - portugal,italy,greece,spain own some good quantity of gold and they would want to sell it to survive. As the economy of these countries look bad, we saw the $ also rally, which moved gold down.
What will let gold rally then? - the dollar moving down, flight to safety - move to gold!!. I have not been able to understand that concept about an inflation hedge :(

Subhankar said...

There is confusion about the concept of inflation. Does inflation cause prices to rise? Or does the increase in printed money supply cause rising prices, which lead to inflation?

Increase in the money supply led to the fall in US dollar value. That caused 'flight to safety' towards commodities, including gold. Now that the US economy is showing signs of recovery, the dollar is increasing in value - leading to a correction in gold prices.

That is a logical explanation - but markets often move due to sentiment and speculation, particularly in the short term.

Some bail out package will be worked out for the PIIGS. Don't think they will resort to selling gold.