What’s up with gold?

[Anonymous]

Re: China and Gold. I’m not very knowledgeable about money supply issues, but it seems to me that China is happily printing money just like the US is. Some info for this year:

http://en.ce.cn/Markets/Currencies/200604/15/t20060415_6708398.shtml

We’re worried by the American M3 growing 8% this year, but China’s M2 grew 18%, and their M3 must be much higher. Bank loan policies are just as lax as the US, and the investment just as improductive (real estate, useless industrial parks, etc.)

China’s inflation is pretty high too, but I don’t know if their CPI measurement is as creative as the US’s so it’s hard to compare the two.

I don’t see any gold backing coming while the printing presses are on like that. But as I said I’m just starting to learn about money supply issues. What do you guys think?

[Jim Brubaker]

People do not understand what gold really is. Imagine if your body temperature went from 98.6 to 106 degrees. More is better right??? Gold is a measure of what your currency is perceive to be worth, it is a thermometer.

In the late 60’s, if you had 10% of your savings in gold, at $32/oz you would have doubled your savings when it jumped to $320/oz. Gold moved one decimal point to the right. It wasn’t because gold was perceived a a commodity, the government had been printing too much currency to fund the Viet Nam war and LBJ’s social programs.

Now step ahead, oil has doubled in price. Ask yourself one question: Has oil doubled in price or have we printed so many dollars that they aren’t worth what they use to be. Oil was $4 a barrel in 1965 and a pack of cigarettes was 25 cents.

Gold is not an investment. When you purchase gold, you keep your government honest. If the price of gold shifts one decimal point to the right, you haven’t doubled your savings. Your 10% investment in gold has kept up with inflation. The rest of your portfolio has been raped royally.

If you are buying gold to speculate, you are in a different ballpark. Gold hit $960/oz in the 70’s and silver (if you remember back that far) went to $50/oz.
That was a special case, Mr Howard Hunt cornered the silver market and the Chicago Commodities board screwed him royally by changing the rules. It was a nice play and it shows you that playing by the rules doesn’t work all the time. I think that the Chicago board of commodities traders just about threw him into bankruptcy. It was either them or him–go figure.

Realistically, if you go back in time to 1970 when gold was $300/oz and a house was $52,000 dollars; a house was valued at 175 oz’s of gold. Now go forward to today, by todays standards, gold should be around $1,000 to $3,000 per oz.

Think of it this way, if gold and oil are going up in price and there is no shortage–its your government at work— printing money.

[sdappraiser]

Bingo.

[lewman]

Powayseller congrats on the gain. I recommend Zeal Intelligence if you want to understand the whys behind rise in gold & other commodities(http://www.zealllc.com/essays.htm). Wondeful thing about this website is these essays are free and easy to read, and the author does use a mix of both fundamentals (which I consider anecdotal at best) and technicals (love those charts). Specifically for gold, check out http://www.zealllc.com/2006/cpigold.htm, and for commodities in general http://www.zealllc.com/2006/21bull.htm.

To determine when to buy / hold / sell, the author uses what he calls “relativity measures”, essentially dividing an asset’s current price by its 200 day moving average and since the gold bull started in ’01 this number has mostly bounced between 0.99 and 1.14. Key thing is while it is not a sure win, your probability of success will be enhanced if you buy when this number gets near 0.99 and get out when it gets near 1.14. Now, gold’s current price is approx at 1.26 times its 200 dma. Therefore if you believe that this band (0.99 and 1.14) will continue to hold the answer to your question is sell now.

However, life is of course not that easy, pls do appreciate one fact, and that’s for this measure to go down to 0.99 or a more reasonable level, it doesn’t necessarily require gold price to drop. For example, if gold simply bounces around within a narrow band of +/- 5% for a number of months (which is what it’s doing so far since it hit the high of $645 last week), its 200 dma will eventually catch up to the current price for the relativity measure to get back towards 0.99. So the catch is if you sell now, you may not be able to get back in at a better price. And human psychology may tell you to wait for this “better price” and you end up watching gold go to $700, $800 … and you’ll hate yourself for that 🙂

The danger of selling too early was well demonstrated in the late ’90s. Remember when Alan Greenspan warned us about irrational exuberance back in … I think ’96 ? Well he was right but his timing was too early. Imagine if you got out then you would have missed some hefty stock market gains of the late 90s.

There’s a trading strategy that may alleviate that and that’s the use of trailing stops. For example, you bought gold at $600. Let’s say your comfort zone is a max loss of 20%. Then your 1st trailing stop is set at $600 – 20% or $480. Then as gold price moves up your trailing stop gets adjusted upward to always equal to -20% of the highest price but rule is once a trailing stop is set you never adjust it downward. Gold last peaked at $645 so your trailing stop should now be at $645 – 20% or around $520. From this point on, if gold drops down to $520 you sell but if it resumes its uptrend after this round of consolidation you keep moving your trailing stop upward. This will allow your profits to run … especially in times like these when arguably fundamentals have been thrown out the door albeit temporarily but with war fear there’s no telling how high it could go (what if israel does a preemptive strike on iran?). There are of course many other trading strategies but this is one I found that probably offers a good mix of allowing you to ride a bull market as much as possible without incurring too much risk.

Good luck.

[Author]

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