Thursday, November 11, 2010

10 years Gold Chart Pattern: a parabolic rise

Two months back, the gold chart pattern indicated a slow down of upward momentum which led me to caution investors that a drop below the 14 day SMA may be the first warning of a possible change of trend.

I had also mentioned the possibility of a bearish double-top pattern forming on the gold chart, which could also lead to a change of trend. Neither of the bearish scenarios played out. All that happened was a brief dip to the 14 day SMA, followed by a $100 rise to a new high above the $1350 level.

A bout of profit booking took gold’s price below the 14 day SMA for a few days, but the $1300 level was not breached on the downside. The next up move took the price to another new high above the $1400 level, where some consolidation is taking place.

I have been looking at the 1 year chart of gold prices, and failed to observe the long-term bullish strength of the yellow metal. This time, let us look at the 10 years closing chart pattern of gold:

image

Gold prices have seen a parabolic rise during the strong bull market of the past 10 years. The bear phase during 2008 was the only occasion when gold prices dipped significantly below the 200 day SMA.

If this parabolic rise continues, gold prices could double or even triple from current levels within 18-24 months. The recent QE2 announcement by the Fed seems to have provided fuel to the bullish fire. Should investors enter at this late stage of the bull market?

That should depend on your experience, comfort and asset allocation plan. Remember that an investment in gold doesn’t provide any returns in terms of dividends, splits, rights issues or bonuses – like an IBM or TCS stock does. The entire play in gold is about safety and low-risk capital appreciation. A 100% gain in two years is no mean achievement.

To put things into perspective, the TCS stock has gained 300% in the past two years (adjusted for the 1:1 bonus issue last year) – and that doesn’t include all the annual and interim dividend payments. Even silver has outperformed gold by rising 200% in the past two years.

By all means, consider investing in gold even at current prices if you haven’t invested earlier. But keep the allocation to gold at 5-10% of your total portfolio value. Physical gold has associated safety and storage issues. Gold ETFs are readily bought and sold on the stock market like shares. 

4 comments:

Dilip Raju Lillaney said...

Interesting article. I am a regular reader and loved this article on Gold. Even investors like Seth Klarman are considering Gold because they don't trust paper money and stocks are not attractive at current levels for value investors.

Subhankar said...

Appreciate the feedback, Dilip.

Among the well-known investors, Warren Buffett and Rakesh Jhunjhunwala are not particularly enamoured by gold as an investment. But many others seem to have joined the gold bandwagon.

Hope there is not a bad ending to the gold story!

rashmi said...

hii,i accidently tripped onto ur blog.good reads,i must say.what are ur views on silver,its rise has been meteoric as compared to gold.any updates,plz

Subhankar said...

Thanks for visiting the blog, and for your kind words.

Silver has been outperforming gold for some time. But I'm not a great fan of buying physical commodities - due to storage and security hassles.

As far as I know, there are no silver ETFs. Gold ETFs are my preferred investment option