Go for Gold – a guest post

Despite the title, this post has nothing to do with India’s splendid performance in the just-concluded Commonwealth Games at Delhi. I have been writing about gold’s chart pattern for the past few months, and have watched in amazement as gold’s price soared.

Those who have read those posts may be aware that I am not a great fan of investing in gold. Nishit’s views are the exact opposite of mine. In this month’s guest post, he provides logical arguments why investors should consider adding a fair chunk of gold – preferably gold ETFs – to their portfolios.

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The Gold rush has begun again. Gold has sharply increased from about $1250 per ounce to almost $1385 per ounce in a little more than a month. Why has gold’s price increased so dramatically and will the rise continue? Let us dig a bit deeper to come up with the answers.

But first, a bit of history. The California Gold Rush (1848–1855) began on January 24, 1848, when gold was discovered by James W. Marshall at Sutter's Mill, in Coloma, California. News of the discovery brought some 300,000 people to California from the rest of the United States and abroad. Of the 300,000, approximately half arrived by sea and half travelled overland. It sparked off a period of economic boom in America, and has been the subject of many movies.

http://en.wikipedia.org/wiki/California_Gold_Rush

Gold has always attracted mankind through the ages. Gold does not have many industrial uses; it is not edible; it does not give any returns on investment. Then why is it so attractive to man?

Since time immemorial, gold has been used as a currency. Till 1971, the US dollar was linked to the Gold Standard. The Gold Standard was a monetary system in which a region's common media of exchange were paper notes that were freely convertible into a pre-set, fixed quantity of gold. So, for every dollar the US government printed they needed to have an equivalent quantity of physical gold.

Once the Gold Standard was dropped, it lead to the debasement of the currency. The government could print as many dollars as they wanted, provided that there were takers for those dollars. Gold is primarily used as a hedge against inflation, something which can be used as protection in times of crisis, and has everlasting value.

There are several reasons why I am adding Gold to my portfolio:

1. Diversification

2. I have been noticing that Gold prices have kept going up in Rupee terms since childhood. As late as 2005, I had bought gold for Rs 6500 per 10 gms.

3. The debasement of the currencies by various governments. Some one has to pick up the tab for the profligacy of the Western economies. By printing more money, you simply are delaying the problem.

4. It is made in limited quantities and Gold is one metal which makes people go crazy. It’s not as if tomorrow you are going to find huge gold reserves.

5. Limited supply and the tendency of Indians to keep hoarding gold. I doubt if even 20% of the gold Indians buy every year comes back in the market.

In any investment, I also look at the downside. Gold is not going to be worth Zero Rupees. In the worst case it may fall by 20%. We have not yet entered the speculative blowout stage.

If we look at the gold chart from 1975, gold has gone up from US $150 per ounce to more than $1350 per ounce now. A gain of 800% (9 times). This factors in the booms of the economy and the recessionary trends as well.

With debt crises all over the world, it is not a bad idea to have some portion of one’s assets invested in gold. One can look at the Exchange Traded Funds (ETFs) listed on the NSE as a safe way of investing. This does away with the headache of storage and provides liquidity as one gets cash in 2 days by selling the ETF, like any stock.

Why did gold’s price spurt so dramatically in the last few weeks? It is clear that the massive ‘Quantitative Easing’ has not produced the desired results. The US Fed may pump in more money for ‘Quantitative Easing - Part 2’ and Gold will soar the moment the package is announced. I see price targets of US $1500 per ounce and even higher in the coming years. At least 20% of one’s portfolio should contain gold as a hedge against inflation and the madness of US government printing more dollars.

The upward-sloping channel in the Gold Price chart above has a price target of $6000 per ounce!

Tailpiece: The movie McKenna’s Gold, starring Gregory Peck, is a wonderful depiction of man’s lust for gold. It’s a classic western.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

BSE Sensex and Nifty 50 charts – an update (Oct 12, ‘10)

BSE Sensex Index Chart

In last week’s update, I had mentioned that the BSE Sensex chart had achieved its upward target of 20600 as measured from the break out point above the year-long consolidation pattern, followed by a pullback to the narrow trading band. But the technical indicators were showing negative divergences – the RSI had made a lower top and the MACD and slow stochastic remained flat while the Sensex touched a new high.

The following observation was made:

‘In case the pullback turns into a correction, the lower edge of the narrow band at 19772 and the rising 20 day EMA should provide support.’

The Sensex has started to trade in a narrow downward-sloping channel, but is yet to reach the level of the rising 20 day EMA (now at 19973). The level of 19772 is just a little below the 20 day EMA. Will either of them support the Sensex fall?

The continued weakness in the technical indicators means that the correction may continue a bit longer. However, the FIIs are still net buyers and any fall in the index seems to be receiving buying support.

That opens up the possibility that the narrow downward channel is actually a consolidation pattern that forms after a sharp up move - known as a ‘flag’. If the Sensex breaks out above the channel within the next few days, it can rise quickly, with an immediate upward target of about 22400.

That was the bullish view. Since the Sensex is in a bull market, it is only natural that the bullish view gets precedence. The lower IIP numbers didn’t affect the index too much, but negative surprises during the upcoming Q2 results season could. If the Sensex falls below 19772, it could fall to 18500.

Nifty 50 Index Chart

The NSE Nifty 50 index chart pattern has a similar downward sloping channel in which the index had been trading for the past 7 sessions, during which it touched a high of 6223 last week.

The MACD is positive but has given a bearish cross below the signal line. Both the RSI and slow stochastic have dropped from their overbought zones and seem headed towards their 50% levels. Volumes have started declining with the index.

If the correction continues and the Nifty 50 falls below the level of 5932 (the lower end of the narrow trading band discussed last week), it can drop to 5550. That is the bearish view.

An upward break out from the downward-sloping channel, which is beginning to look like a consolidation ‘flag’ pattern, has an upward target of 6800. If the ‘flag’ pattern does play out, the upward target can be touched quite soon – even before Diwali.

Just remember that technical analysis is more art than science. The bearish and bullish possibilities have been discussed. Only Mr. Market knows how things will pan out in reality. If you are already in the Diwali gambling mood and ready to place bets on either side, make sure you protect yourself with adequate stop-losses.

FTSE 100 Index Chart Pattern – Oct 08, '10

The FTSE 100 index chart pattern had last closed above the 5600 level on Sep 20 ‘10 before slipping into a sideways consolidation for the next 10 sessions, during which it failed to close above the 5600 mark. Last week, the index emerged from the sideways consolidation by going above the 5700 mark on an intra-day basis for the first time since Apr ‘10, and had four straight closes above the 5600 level.

The FTSE 100 received good support from the rising 20 day EMA and all three EMAs are rising with the index above them. Since the low of Jul ‘10, the index continues in a ‘higher tops and higher bottoms’ bullish pattern and is back in a bull market. Volumes have started to pick up a bit, but remains muted. That is a concern.

The 6 months bar chart pattern of the FTSE 100 index shows a bullish rounding-bottom pattern that is more clearly visible in the 50 day EMA:

For the bulls to regain control, the Apr ‘10 top of 5834 needs to be crossed on strong volumes. Friday’s (Oct 8 ‘10) close was less than 200 points lower, so it could be a question of time before the FTSE 100 touches a new high. But without volume support, the rally could fizzle out again.

The technical indicators are showing negative divergences. The slow stochastic has slipped below the overbought zone and has made a lower top. The MACD is flat in positive territory and touching the signal line. It has also made a lower top. The RSI dropped to the 50% level before bouncing up. The MFI is looking the weakest and is below the 50% level.

The bears are lurking around the corner and a correction down to the 50 day EMA could be on the cards. At the time of writing this post, the FTSE 100 is trading in a narrow range of 25 points near last Friday’s closing level.

Bottomline? The chart pattern of the FTSE 100 index is trying to emerge from a 6 months long consolidation period, and is still not quite out of the woods. Stay invested with trailing stop-losses. Fresh buying can be considered after a high volume break out above the Apr ‘10 top.

American Index Chart Patterns – 5 year charts

The long-term American index charts are showing contrasting patterns. While the USA and Canada are struggling to get back into a bull market, having barely crossed the 50% Fibonacci retracement levels of their bear market falls, Mexico and Argentina are trading at all-time highs. Brazil is less than 4% below its all-time high.

Here are the 5 year charts of some of the American indices.

S&P 500 Index Chart

The S&P 500 index chart has crossed the hurdle of 1150, and has closed above the flat 200 day EMA. The Apr ‘10 closing high of 1217 has to be crossed convincingly for the bulls to regain some control. The Oct ‘07 closing high of 1565 is way out of sight.

Canada TSX Composite Index Chart

The Canada TSX Composite index chart is in a slightly better shape than the S&P 500 chart. The Apr ‘10 top has been crossed, forming a bullish ‘higher tops and higher bottoms’ pattern. The Apr ‘08 closing high of 14321 is almost 1800 points away.

Mexico IPC Index Chart

The Mexico IPC index chart is at an all-time high, and it looks like it isn’t done yet. One of the best performing markets not only in the Americas, but worldwide.

Brazil IBOVESPA Index Chart

The Brazil IBOVESPA index chart is still 2700 points below its May ‘08 high of 73517. It may be a matter of time before the index reaches a new all-time high. In spite of all the noise about the economic growth of the BRIC countries, the Brazil index chart hasn’t quite made it to the top of the heap – though it is one of the better performers.

MERVAL Buenos Aires Index Chart

The Argentine MERVAL index chart gets the gold medal amongst the American long-term charts. Quite a comeback for a country that was in a state of economic turmoil and high inflation just a decade back.

Bottomline? The 5 years US and Canada index charts are showing the effects of over-leveraged economies and debt mismanagement. Mexico, Brazil and Argentina index charts are faring much better and are among the best performers world-wide. Booking profits in Mexico and Argentina and deploying in Canada may be a good contrarian play.

BSE Sensex Index Chart Pattern – Oct 08, '10

The BSE Sensex index chart pattern touched an intra-day high of 20707 on Mon. Oct 4 ‘10 – meeting the upward target from the break out above the year-long upward sloping trading channel - before starting a pullback down to the narrow trading band between 19772 and 20268.

Nothing unusual about such a pullback. Break out moves from trading ranges are often followed by pullbacks to the trading range. In fact, a pullback down to the 18500 level will also not be ‘unusual’. Bull markets often encounter 10-20% drops after reaching a new high.

Such corrections let buyers enter at lower levels and helps the market to attempt new highs. A look at last week’s long-term Sensex chart clearly shows the periodic corrections during the previous bull market from 2003 through 2007.

The 6 months bar chart pattern of the BSE Sensex index is catching its breath after a fairly sharp up move in Sep ‘10:

 

Friday’s (Oct 8 ‘10) trade has been marked with a blue oval to highlight the fact that the Sensex entered the narrow trading band on an intra-day basis and closed at 20250 - inside the band just below the top edge of 20268.

The technical indicators are showing signs of weakness. The MACD is positive but below the signal line. Both the RSI and slow stochastic have dropped down from their overbought zones. There is no sign of bearishness yet, but the correction may continue next week.

All three EMAs are rising and the index is above them and the ‘higher tops and higher bottoms’ bullish pattern is still intact – which means the Sensex is in a bull market.

There should be no cause for worry even if the index drops below 18500 into the year-long trading channel. A drop there may provide good entry points into some individual stocks. A fall below the 200 day EMA – currently at about 17700 – will be more of a concern.

FII inflows continue unabated. The Government has been making a lot of encouraging noises – about the current inflows not being a concern, allowing FDI in multi-product retail and foreign individual investors to buy stocks directly from the Indian markets. These will be positive for our markets.

Q2 results will start hitting the markets during the Navratri festival period, and are expected to be good. Any negative surprises may cause selling in individual stocks but not in the market as a whole. The Dow and S&P 500 have crossed above important resistance levels and are poised to make new highs.

What can spoil the bull party? Not much that is visible. Valuations are on the higher side but not in bubble territory yet. However, investors should not throw caution to the wind and start buying big time. Remaining circumspect but nimble near all-time highs would be the smart option.

Bottomline? The chart pattern of the BSE Sensex index is facing some profit booking, which hasn’t turned into a full-fledged correction but may do so. A 10-15% correction will restore the long-term market health and make the valuations look fairer. This is a good time to get out of non-performers in your portfolio. Buy very selectively – if you must.

NSE Nifty Index Chart Pattern – Oct 08, ‘10

The NSE Nifty index chart pattern touched a new high of 6223 intra-day on Wed. Oct 6 ‘10. The index had earlier touched 6222 on Mon. Oct 4 ‘10. This doesn’t count as a double-top because they occurred so close to each other.

The negative divergences in the technical indicators, the widening gap between the 50 day and 200 day EMAs and the volume action last week had given warning signs of an impending correction. It was no great surprise that the Nifty lost ground on the last two days of the week.

In spite of the heavy volumes on the two down days, the index got support at the top of the narrow trading range from which it had broken out last Friday (Oct 1 ‘10). Let us look at the 6 months bar chart pattern of the NSE Nifty index to assess this week’s trading:  

The technical indicators have turned weaker, though they have not turned bearish yet. The MACD is positive, but has slipped below the signal line. The RSI and slow stochastic has dipped below their overbought zones. The MFI has fallen below the 50% level, and may be hinting at a continuation of the correction next week.

The point of interest is that the FIIs remained net buyers through the week. It is the heavy selling by the DIIs that caused the dip in the index. Much of the DII selling is the result of redemption pressure from individual investors taking profits off the table. Many still remember the devastation to their portfolios caused by the 2008 bear market.

The Nifty 50 got support from the top of the narrow trading range today, and there is a possibility of a bounce up next week. For that to happen, FII buying has to pick up. The recent strictures on FII trading by SEBI may have slowed down their bullish fervour a bit. The hurdle of this week’s top of 6223 needs to be overcome.

Downside supports are likely at 5990 (20 day EMA), 5932 (lower edge of the narrow trading range), 5760 (50 day EMA) and 5550 (top of the year-long consolidation range). The India growth story has now received worldwide investor attention, so there is little chance of a big crash like the one in 2008.

The Government is thinking of allowing Foreign Direct Investment (FDI) in multi-product retail business, which will be a huge plus for attracting investments and employment for the massive number of less-skilled youth of the country. Another plus would be allowing individual overseas investors to buy Indian stocks.

But the biggest plus of all, at least in the short term, will be QE2 (Quantitative Easing, Part 2 – which means another round of printing dollars and euros to revive the ailing western economies). Much of that newly printed cash is likely to make a beeline for emerging market stocks.

Bottomline? The chart pattern of the NSE Nifty index is taking a much needed breather after a break out. A pullback to the 5550 level will restore the overall health of the market, and prime it for a push past the all-time high of 6357. Stay invested as per your asset allocation plan. Reallocate as required. Get rid of junk. Book some partial profits. Buy only if you find compelling value – not otherwise.

Is it a good idea to buy or sell shares on insider information?

Before attempting to answer the question, it may be a good idea to define what ‘insider information’ means:

‘Material information about a company that has not yet been released to the general public, but is known to the company’s board of directors, executive management, employees, consultants.’ 

‘Material information’ means information that can affect the price of a company’s stock – like M&A activities, rights/bonus/stock-split, fund raising, changes in top management, new product launches.

Usually, such material information is formally sent to the stock exchanges before announcing it in public through TV interviews or press conferences. Often, reporters of newspapers or business channels get wind of such information through their sources, and quiz management about it. And managements deny any such plans.

Some times, managements are not available to confirm or deny and the newspaper/TV channel goes ahead and releases the ‘news’. The company then denies the ‘news’ or says ‘no comments’. More often than not, the ‘material information’ is later made public by the company after a few days.

There is a good reason for this play-acting. It is illegal for any one to trade the shares of a company based on insider information. For that reason alone, it isn’t a good idea to buy or sell shares if you have insider information.

Taking or giving bribes is also illegal. But people do it anyway, because it has become the unwritten practice of doing business in India. So why not trade on insider information? What if you trade using your brother-in-law’s demat account? How will you ever get caught?

Using dubious methods to bypass the law doesn’t make the activity legal. But there are logical and better reasons for not indulging in insider trading. And the reasons are simple.

Unless you happen to be the managing director or finance director or a senior consultant of a publicly-listed company, the ‘insider information’ will come to you second-hand or third-hand. That means, those who had first-hand information would have already traded on the basis of the information. And the stock price would be reflecting their transactions.

What if the ‘insiders’ are upright and honest and did not trade on the basis of the material information? Wouldn’t that give you an advantage over the general public? Well, if the ‘insiders’ were really honest, they wouldn’t go around leaking insider information, would they?

A more important reason is the quality and financial strength of the company. Most ‘insider information’ being made selectively available to small investors are invariably about third and fourth rate companies. You will almost never get any insider information about L&T or ITC or Tata Steel. It will always be about little-known small-caps or companies that have seen better days.

A reader recently emailed me with a query about a PSU whose glory days have been left far behind. I responded that the company is trying to come out of the woods, but the technical chart looks very bearish. The reader then revealed that he had some ‘inside information’ that could lead to a sharp spike in the stock price!

Insider information and hot stock tips tend to fly around when the stock market is near a top (like now). Smart investors should use such information to sell, only if they happen to hold such stocks.

That was the long answer. The short answer is: No.

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