Gold: Overbought, But Still Trending Up

Gold was the buzzword at the Sovereign Society's recent Offshore Academy.

Nobody is more bullish on gold than I am, but the majority of European money managers and bankers at the meeting were generally bullish on gold, while a few expressed concerns after the rally of the last four weeks.

My view is that any correction should be interpreted as another in a long series of opportunities to accumulate gold in the age of violent capital markets, skyrocketing U.S. and Western government deficits and broad-based currency devaluations across the world.

Gold, though overbought near-term, remains in a formidable uptrend.

I would, however, avoid making fresh investments into gold mining stocks after a stunning 165% rally since last fall. Wait for a pullback before buying gold stocks again. (Click chart to enlarge)

Uncertainty Drives Investors to Trusted Value: Gold

When asked at Cabo San Lucas, Mexico, whether now is the "right time" to buy gold, my reply was to apportion 50% of your allotted target right away and the balance on any impending correction. The market might run away from here, though I highly doubt it because everyone is too bearish on the dollar and the buck should muster a violent but powerful short-term rally.

I would use this opportunity (dollar strength, however short-lived) to buy more gold, silver, the Norwegian kroner, Canadian dollar, euro and Aussie.

Indian Gold-Buying Makes a Splash

Recent news that the Indian central bank purchased 200 tonnes of gold from the IMF sent prices sharply higher again – gold crossed the $1,100 mark intraday before pulling back to close at $1,095 an ounce. Monday morning, gold was trading at $1,132 an ounce.

Though the Indian central bank is buying gold at these levels, they're defying the broader trend in Indian fabrication demand, which has collapsed since $750 gold last year. The majority of Indians, the world's largest consumers of gold jewelry, aren't lunging after gold at these prices…at least not like they have in the last few years.

Traders commenting on a recent editorial in the Financial Times said they believed India's $6.7 billion dollar purchase was the largest by a central bank in more than 30 years. Other central banks are likely to follow.

Clearly, global investment demand for gold is booming as investors, institutions and central banks in Asia accumulate gold at the expense of the IMF and heavily indebted Western nations.

I expect this trend to continue for many years as we witness the greatest transfer of wealth from West to East, marking the end of Anglo-Saxon global financial domination after nearly 300 years.

Comments

[Laurence Hunt:]

Your observation that gold may remain a superior investment to the gold stocks has certainly held true since March 2008, in fact, from as long ago as November 2003 and May 2006. Bill Fleckenstein recently stated that gold stocks have been trading as if they are radioactive. However, current developments are likely to boost the margins of the gold miners considerably. Thus, the fact that they have risen dramatically from depressed levels in October 2008 (at that time, they revisited levels last seen as long ago as June 2002) hardly means that they have climbed too far or too fast. We are just now surpassing strata in the HUI that were observed 2 years ago, when gold first challenged the $800 level. Yes mining costs have gone up - but not all costs, such as energy, which at $100 oil was pricier 2 years ago than now. The HUI:Gold ratio in late 2007 was ranging from .50 to .55. That ratio fell to .205 in October 2008. We have just now surpassed the .41 level in the ratio. It is true that gold mining companies have reported more than their share of bad news, even recently. But it's hard to argue that good news is not on the way with gold surpassing the $1100 level. Here's a rule of thumb. Gold has not surpassed its February 2009 levels in most currencies (at which time the US dollar was considerably stronger). Gold is certainly going to move to new highs in currencies other than the US dollar before the current run is through - and not just because the US dollar may bounce. So is gold done yet? I don't think so. Are the miners done their run? No, we have some ways to go in revaluing the gold miners as well.

Nov 16 11:50 PM

[TraderRob:]

Gold is a beast to be reckonned with during these times to say the least.

Reasons for why investors won't pull out of the heavy metal include (1)the still present fear factor which so silently speaks out through the metal, (2) the hedge against inflation which has already begun in asset prices, (3) the realization that even upon a pullback in equities the potential for dollar resilience in the long run is historically low.

I doubt that there will be much of a chance for gold to give investors a second to buy it and that it will soon divert it's tragectory from the non-precious metal commodities.

Nov 17 02:57 AM

[DONE_SONZ:]

You guys and your stupid correction calls.What justifies any correction in gold?The broken fiats will just keep sending it higher.

Nov 17 06:54 AM

[mtt04:]

That OK people - the wall of worry is huge and you need to get off the bus.

We'll stay on thanks.

Nice try.

Nov 17 09:51 AM

[mtt04:]

It never ceases to amaze me. I've been in gold stocks since before 9/11.

Every time they run the establishment tries sooo hard ot push them and yet they are best performing this decade bar none.

Keep it coming - I'm now rich on the negative sentiment.

Once the dumb dumbs in my neighborhood tell me that gold is the greatest thing - then I'll bail - not before.

Nov 17 09:53 AM