Tuesday, November 26, 2013

When Will Gold Be a Buy?

Polski: Sztabka złota ważąca 12,5 kg. Własność...
Gold is a timeless asset that is often considered to be a store of value. We know this because it has held its value through time. For example the cost of a lunch for two at the Savoy has approximately followed the value of a sovereign over the twentieth century. However, that lunch would have included a mighty fine bottle or two of claret in 1980, whereas in 1999, you may have had had to drink tap water. That’s because whilst gold holds its value over the long-term, the intermediate periods can be highly volatile. If you returned to the Savoy with your sovereign again in 2011, the maître d’ would have been far more receptive.

That point about gold’s cyclicality is fundamental. Had you invested in gold at the beginning of the 1970s, gold would have returned 27 times your original stake. However, the price fell up until 1999, which meant you had to endure two decades of pain. Then from 1999, or more specifically 2001, gold rose from $255 to $1,900 up until 2011. So knowing when to focus on gold is powerful, but it’s also vital to understand what is happening elsewhere.


For example, inflation averaged 7% in the USA in the 1970s, when equities only returned 1.5% per annum; a negative return in real terms. Thereafter, from 1980 to 2000, equities returned 14% per annum, whilst gold lost 3.5%. That’s the difference between halving your money in gold or multiplying it 14 times in equities, and that’s not including dividends. More recently, from 2000 to gold’s peak in 2011, equities returned more or less nothing whilst gold multiplied seven fold.

So you can buy gold and hold it forever and that’s not a terrible idea if you want a long-term store of value. But if you want your wealth to work harder, you can make that occasional and gargantuan decision when to focus on gold or equities. Of course, you don’t have to see it in quite such a binary manner. When gold isn’t working a 5% to 10% position won’t cause much harm whilst the remainder of your portfolio is focused on more productive investments. When gold turns, it’s time to reduce equities and increase your position in gold.

Atlas Pulse recognises that gold has had a great run since 2001 and the bull market is over. We downgraded gold in January from ‘strong bull market’ to ‘bull market’, then to ‘neutral’ in February and to ‘bear market’ in April. Each downgrade is an indication that you should consider reducing exposure to gold.

So the bad news is that gold is in a bear market and that has some way to go. However, and given the experiments carried out by our over-confident central bankers, that won’t last forever and we believe the final low for gold is likely to occur sometime in 2014 at a materially lower price than we currently see.

We analyse everything. We look at long-term trends, relationships with other assets, investor behavior, central bank purchases and sales, the price of options, sentiment surveys, time projections, price projections, volatility and seasonality. All of these, in aggregate, help us to build a picture or the risks and rewards that lie ahead.

We cannot say exactly when or at what price gold will be at any given time in the future, because we are not charlatans, but we can make an informed decision about the state of the ground that lies ahead.

When gold makes it’s low, sometime later in 2014, no one will call you and say buy now. The papers will have forgotten about gold altogether and the perma bulls who have been shouting about gold going to the moon will, thankfully, fall silent. The end of this gold bear market will be a rare opportunity to buy gold cheaply. As the market improves, Atlas Pulse will upgrade to neutral and then bull market and so on. Each upgrade will be a good opportunity to buy more gold with confidence.

A subscription to Atlas Pulse is a modest outlay. It provides you with an informed round-up of the gold market. Timely updates are also provided when there is a change to the outlook, so you don’t have to wait until the month end when something important is happening. By reading Atlas Pulse, you will learn more about the asset you own.

Atlas Pulse is the voice of reason in the gold market, and by god, it needs one.

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