Gold prices staring at the global situation

In the short term there is likely to occur consolidation, but many global problems that occur can lead to rising gold prices.

On Thursday, March 24th, gold hit another record high of $1448.60 an ounce as it attempted to breach the $1450 an ounce level for the first time in the history of the yellow metal. Since then the price has pulled back slightly and as to be expected, once again, investors are asking if the price is too high, and if gold is in a bubble.

When this bull market in gold began in 2000, the price was $250 an ounce. At the time, practically every main stream analyst saw no value in gold and advised clients to stay well away from this metal. It was referred to as a barbaric relic that no one wanted and besides who on earth would want to invest in something that did not pay a dividend?

Then, the price went to $500 and the same comments were repeated by the same analysts. When the price went to $700 an ounce the same analysts were emphatic that the price was in a bubble and they continued to denigrate gold as an investment. But, the price of gold continued to climb and when it broke through the $1000 an ounce level, the same analysts remained adamant that the price had then reached a top and offered investors no value whatsoever. And, on most occasions, their reasoning had very little to do with the real events driving the price higher. I always remember one market genius, who always had a negative view on gold and who would always say, with a smirk on his face, that investing in gold was a total waste of time because demand was mainly dependent on a few housewives living in India. Boy, I sure would like to meet those ladies as they must have access to huge amounts of money judging by the way they have driven this gold price higher.

In the meantime we should not forget that since 2001 while the gold price has increased by almost six times, the same can't be said regarding equities and bonds. And, while the price of gold has increased, we have seen global currencies fall, property fall, equities fall and rise, and bond prices fall. So, are we in a bubble? Is gold such a bad thing to include in your portfolio? And, my answer remains the same as it has been for several years now. Gold is not in a bubble and it should be included in your investment portfolio.

The analysts, who over the last ten years or so have remained negative on gold, have not only missed an amazing opportunity for their clients but, they have also failed to understand the fundamentals driving the gold price higher. And, while the price of the yellow metal could pull-back from its recent highs the underlying driving forces have not changed. When asked if the price is going to pull-back, I always tell my clients that in the short-term I have no idea, and while it is possible I don't particularly care. I am in this for the long-term and see prices going much higher. Therefore, I simply do not pay much attention to the corrections along the way, other than to use them as buying opportunities. And, since my investment choice consists mainly of bullion which is paid for, I do not have to worry about any short-term drop that a trader using leverage has to worry about.

If you speculate in the gold market or any market for that matter, and if you are using a leveraged instrument such as a futures contract and the price moves in the direction you anticipated, high leverage can yield large profits in relation to your initial margin deposit. But, if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin deposit. Leverage is a two-edged sword. On the other hand if you have paid and stored your physical gold, while the total value will fluctuate relative to the price, if there is a sharp short-term drop, there is no need for you to have a sleepless night. The price will ultimately recover and over the coming years it will increase in value.

It seems to me that natural and man-made disasters are becoming increasingly common. While I cannot offer any explanation regarding the causes of natural disasters, and thus have no idea what to do in order to avoid them, I can at least try to avoid some of the man-made disasters that can have an equally devastating effect. In fact, some of the blunders that man can make can cause misery and unhappiness on scales unimaginable. While there are many ways in which man can destroy, the one form of destruction that I am alluding to is financial destruction, or more specifically the erosion of one's wealth. Without money life can be extremely difficult and miserable. Can you imagine what it must be like to wake up one day and find that all the money you have saved after working most of your life has just become worthless?

This is exactly what happened in Zimbabwe where Mugabe and his bankers, totally destroyed not only the country's monetary system but the wealth of many individuals who had spent their entire life saving for their retirement. In Zimbabwe the state does not offer social security or pensions for the old aged. Now, those people cannot find work and have to rely on financial assistance from friends and family while Mugabe and his group of bandits continue live in the lap of luxury. However, those people who owned hard assets such as gold escaped this devastation.

While no logical thinking individual can compare Zimbabwe to the US or the Eurozone, the effect of currency debasement is the same. It ultimately, lowers the value of the currency, and causes higher inflation. It also lowers the standard of living of many citizens and eventually erodes their wealth. But, precious metals such as gold and silver protect against this.

As current events continue to unfold, it looks as if the expansionary monetary policies of central bankers are set to continue. This will ultimately cause a great deal of destruction. If you believe that this policy does not cause inflation, and does not weaken the value of the respective currencies, fine. If not take the necessary precautions and invest in gold.

Once again, I am going to include what Peter Munk, chairman of the world's largest gold producer Barrick Gold, said in an interview at Davos. I am including his statement again because I believe it is so profound. He said, "If you are a utopian, if you believe the problems of currency, the problems of terrorism, the problems of unrest around the world will all be resolved by the end of the year, then gold would have a difficult path. If you believe like I do that we bought ourselves a temporary peace from the panic of last year and the year before, [and] that the fundamentality of the problems are long term still issues, then your attitude will be a bit more positive toward gold."

TECHNICAL ANALYSIS

The price of gold seems to be hitting resistance at around $1440 an ounce (R1). This suggests that while prices will maintain their upward bias, we may see some consolidation in the short-term.

This article was written by David Levenstein. David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients. www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.

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