Sunday, 3 January 2010

JANUARY 2010: Investment Outlook

This month, as well as a run-down of the most significant developments in the glittering world of savings, stocks, property and bonds, I'll take a more in-depth look at the prospects for commodities - this time, specifically, gold

Along with oil, silver and other metals, gold has enjoyed a strong rebound since the dark days of late 2008 and many pundits are calling for more spectacular gains this year - should you pile in?



  • As inflation drifts even slightly higher, keeping your money in ordinary savings accounts with pitifully low returns means you lose money.
  • The top savings rates have taken a breather after nine months marching higher, but fixed rates still offer good returns
  • There is room for savings rates to push even higher this year, offering the juicy prospect of locking in a high fixed rate before they plummet again into 2011 and beyond



  • Technical indicators strongly suggest a moderate pull-back in prices is imminent 
  • Boring, defensive sectors, such as utility companies,  which have lagged since the blast-off in March '09, could be the biggest winners in 2010, whilst sexy stocks which led the charge higher (technology, financials, commodities) are now the likeliest dogs
  • Stocks have now retraced 50% of their losses from 2007 and met strong technical resistance levels - a great place to lock in some profits, or switch a portion of your pension holdings from stocks into cash




The latest hot investment sector which got cabbies, shoe-shine boys and dinner-party hostesses chattering recently was gold.  Encouraged by fevered talk from members of the precious metals' cult ("Gold to $9000!" they shrieked) punters piled in and were rewarded with a spectacular rally in the yellow stuff.

I have to admit I've always been unnerved by the fervour of so many who espouse the wonders of gold.  They too often seem to have come from the same DNA strain which produces neo-cons, climate change fundamentalists and activists for the gun lobby.  Not that you, dear friend and honest gold-fondler, are related to any of these strange creatures.

At heart, many fanatical 'gold-bugs' are born rebels, deeply suspicious of government (every government, in every way), seeing the wealth paraded in today's society as a sham based on worthless and degraded paper money.  GOLD! (they insist) is different.  GOLD! is the only true currency, the one store of wealth which will never lose its intrinsic value, never destroyed, always in demand, hoarded by paupers and kings alike, burnished over thousands of years, it will still be shining even when the cloud-capped towers fall, its light undimmed in the eyes of a thousand generations - !


Societe Generale produced a chart recently which traces the real (adjusted for inflation) price of Gold over seven centuries.

Click to enlarge

Hmm.  Doesn't look like such a surefire long-term play does it?  Nor does this:

Here's a mere two hundred years of data comparing gold's real price versus a variety of other asset classes.  A dead cert, would you say?

Now let's be clear.  I'm not suggesting gold is a worthless investment.  I'm certainly not suggesting you'd have to be a nutter to buy it (although...) 

I am suggesting however that, if you are attracted to it as an investment, you ignore everything you've ever assumed or read or been told about the stuff and ask yourself the exact same questions you'd ask when buying any other investment asset. 

  • On what fundamental basis am I buying it?
  • When should I buy it?
  • When will I sell it?
  • Is there more potential reward than risk in purchasing now, and what exactly are those rewards and risks?

Gold has NEVER been a sure-fire investment.  Fools who bought the stuff in 1980 and never sold (when it was $850 an ounce and inflation was spiralling skyward) have had to wait 30 years just to break even.  Because remember, unlike other assets, gold cannot pay you an income.

Fortunately there are times and ways to buy gold sensibly and minimize risk, just as there are, occasionally, good fundamental reasons why the price should go up.

Seems to me there are four conceivable reasons why the price could shoot still higher:

  1. Inflation takes off - in which case it's a hedge
  2. Currencies collapse - in which case it's insurance
  3. There have been reports of increased buying interest from governments and hedge funds
  4. Pure speculation

Neither inflation nor currency crises have happened yet and are based on assumptions which, from a purely objective standpoint, may prove unfounded.  What's more, there was little danger of inflation or currency collapse between 2001 - 2007 and that didn't stop the bugs buying.  Nevertheless, given conditions today, these remain perfectly valid reasons to own some gold.

The third reason is subject to debate, since governments and hedge funds are often secretive, obfuscatory and tardy about announcing their gold purchases.  China, for instance, only released the information that it had bought more gold over the past six years in 2009.  How can you possibly know what they're doing now?  How can you base your own investment strategy on such information?

And John Paulson, the first major hedge fund player to make a massive bet on gold and have it well-publicized, also quietly bought a $3billion interest in its mirror-image, the dollar (see below), presumably as a hedge.  Amidst all the hullabaloo over his purchase of gold, this fact generated zero interest.

So that just leaves us with the fourth reason: pure unadulterated speculation.  I would have more respect for die-hard gold-bugs if they admitted this was the main reason they were buying, but pigs might fly. 

THE FACT IS THAT GOLD IS THE LAST BUBBLE.  Can it go higher?  Sure.  Will it burst?  Absolutely.

Here's a link to a chart I mailed to one friend last summer, as gold was trying to break out above $1000.  I've since updated it.  It shows a common technical formation in which the price consolidates for a lengthy period then suddenly breaks up in a parabolic move.  Piling in after such a break-out has provided easy pickings for gold lovers these past ten years.

But I'm now beginning to believe this latest surge in gold may be over.  Here's why.

Gold's ironclad correlation with the US Dollar - click to enlarge

The obvious thing to bear in mind about most commodities is that, being priced in dollars, their value fluctuates with the ups and downs of the green-back.  In no case is this more obvious than with gold which, especially since the mid-1990s and the great speculative asset grab we've seen, has risen and fallen with the dollar in almost perfect symmetry.

Right now, after a long period in which it was thought to be doomed, the dollar is at last showing serious signs of strength.  In such an environment it is impossible for most commodities to gain traction.  So if you can anticipate the dollar's next big move, you'll have gone a long way towards making money in gold.  Here's one straightforward strategy:

Click to enlarge

This has the virtues of both simplicity and safety.  It's also easy to act upon, since signals only come around on average only once every couple of years.  It's possible to achieve better results by trading on daily rather than weekly charts, though it would involve keeping a closer eye on things and trading more often.  You can create charts of your own entirely free at certain websites.  Get in touch for details.

As for the current situation, the dollar has hit its 200-day moving average and is deciding whether to zoom further up towards its 200-week average as shown above.  If it does, it's quite possible that gold will pull back to $1000 or even to $900 before it can stabilize and mount its next attack.  A period of consolidation is therefore highly likely, which will probably only end when the dollar breaks down from one of its moving averages and drops towards new lows at 74.

So it would appear the party is over, at least for now.  I will consider buying gold, but only when it either breaks above its high at $1220 or falls to its 200-day moving average, now around $1020.


That's it for this month.  Next time in this space I'll attempt to untie the knotty world of savings and explain how and why keeping cash is far from the hopeless investment it's currently made out to be.  That'll be in your next no-nonsense Investment Outlook on Sunday, February 7th. 

Meantime, thanks again for reading and have a great month!