GOLD IS BACK UNDER $1300 AN OUNCE, BUT GOLD
PROMOTERS ARE TALKING ABOUT $5,000 AN OUNCE.
Sunday October 13, 2013 update: The price of gold this past week closed at $1273 an ounce, and back under an important support level
of $1300 an ounce. Over the past several weeks briefly traded north of $1400 again but then fell back, and now with
a close well under $1300 an ounce it is hard to imagine another rally for gold will be coming anytime soon.
the gold promoters are advertising heavily and "forecasting" that gold could reach $5,000 an ounce. Of course,
they don't give any time frame for such a lofty level for gold. In fact, even a forecast of $2,000 an ounce would be
difficult to believe right now for any time in the near future. There just is no incentive to own gold.
what happens now will depend on what happens with the U.S. budget crisis, the crisis in Syria and how the world markets
including the oil market are impacted. It would take a big slide in our stock market over the budget crisis, or a new
flare up in the Syrian crisis or a big run-up in oil prices and fears of inflation to drive gold above $1400 and keep it there.
And now it appears that the crisis over Syria has at least passed. And there is no crisis with Iran either to wake up
the gold bugs now.
October is historically one of the worst months of the year to own stocks.
Any kind of selling in the stock market this month could help gold to rise. So far the stock market escaped
severe selling even with the budget crisis.
I don't expect a new stampede for gold. Gold
is still in a bull market, and has been for several years, but I think we have seen the highs for gold and I doubt gold will
break out to new highs above $2,000 an ounce. Of course that's just my opinion and gold could fool me and surge if stocks
sell off hard. But the reason why I think gold won't hit new highs is that there are plenty of gold owners who would
like to sell just to break even -- and these are the gold owners who bought months ago at prices ranging up to $1900 who bought
into the headlines that gold might rally to $3,000 an ounce.
Despite this current rally, gold is going through
a correction now. But it is just a correction and it is not a bear market for gold. In fact, the
bull market for gold started several years ago when gold broke through about $1030 and as long as gold stays above $1030 an
ounce, the long term bull market for gold continues in effect.
Long term charts can show a bull market with sharp
and sudden corrections and that is what we have been seeing.
A gold price under $1030 is required to declare
that the bull market for gold is dead. But at the same time traders should be cautious about any moves to the upside.
The gold price could flip and flop between current levels and all the way up to about $1900 an ounce before we can say gold
is having another run to higher levels. Right now you can sum up the market to say that over the long term, the trading
price for gold is undergoing a wide, sloppy trading range.
Sucker!! That's what you were if you got
caught up in the brief rallies that temporarily took gold slightly above the $1400 mark. But gold continued to run into
overhead resistance and selling at about $1415 an ounce and fell back -- again. If you got caught up in those short
rallies, you were a sucker. Those were sucker rallies or fake-out rallies. More are likely to come so watch out,
beware, and don't become a sucker.
A key price point to watch
now is $1415. Should gold break through $1415 with conviction there could be a new short term rally. Just don't
be a sucker buying gold now only to find out that the $84 gain of the last two weeks was not the start of a new bull run.
still has a long way to go before it can build up momentum for a real rally. Gold is weak
and gold will bounce around and try to test higher levels. But the reality is gold still needs to test even lower price
levels before it can establish a new base and work its way higher again.
Unless you need to buy or sell immediately it would be wise to await an outcome of this wild trading pattern.
So let's say that the gold rally resumes now. How high can it go?
Certainly the bulls and the dealers and the sellers are going to argue that $2,000 gold will be coming soon. Well, I'm
not going to say that they are wrong about $2,000 sometime in the future, but I think that we still have a lot of overhead
resistance to break through.
Gold of course has always been a hedge against inflation. I looked at several
examples of gold and inflation.
You've probably heard the story that an ounce of
gold matches the value of a man's business suit. When I was a kid in high school, and gold was fixed at about $40 an
ounce you could buy a suit for $40 (yes, but it was at a discount). Back then a "fine suit" was a $100
suit. Today a good suit will cost you about $1600 which matches the recent price of gold. You could spend more
for a suit and yes, you can buy one at a discount too. But I think you see my point even though I always buy my suits
at a discount.
Let me give you another example which doesn't prove that gold prices match inflation
but can beat inflation. When gold was $40 an ounce, a gallon of gasoline was 33-cents. So you could buy about
121 gallons of gas with one ounce of gold. Today, with gold at about $1600 an ounce and gas
selling for about $4 a gallon, one ounce of gold gets you 400 gallons.
How about the price of a house? When gold was $40 an ounce a new house cost about $20,000 so it took 500 ounces
of gold to buy that house. Today, a new house can cost $150,000 (this will vary with geography) and with gold at $1600
it takes 93 ounces. Gold wins again.
Where does gold lose? When gold
was $40 an ounce a visit to my doctor cost $10. So one ounce of gold got me four doctor visits. With gold at $1600
an ounce... well, thank Heaven for insurance. My blood work alone is priced at about $1600 per visit.
Of course gold has
been in a bull market for almost half a decade and even when I was reporting the business news every day on KCAL-TV here in
Los Angeles more than five years ago (I left KCAL9 in October of 2006), I was saying on a daily basis that gold was in a bull
But I still urge caution. Limit your
investments in gold and precious metals to perhaps 5% of your investment money. Remember that gold can fall in price
just as it could keep rising. Gold should be a part of your balanced investment portfolio and that just makes good sense.
Also be careful what kind of gold you buy. Some forms of gold are easier to sell
than others so stick with those forms of gold that are easy to market such as government coins. Avoid privately
minted gold bars and coins unless it is a well known brand. Do not buy jewelry as a gold investment because with jewelry
you could be paying more for workmanship and marketing than for the gold content.
For those of you who bought gold three and four, five or even six
years ago at much lower levels -- when I was recommending the purchase of gold on KCAL-TV in Los Angeles -- you are now enjoying
some solid long term gains. It never hurts to take profits. Remember, no one ever went broke selling at a profit. In my report called "Stock Market Notes" which you will find in the index of this web site, I talk about an event called slumpflation which is when inflation
and recession happen simultaneously. Slumpflation is a rare event but gold could rally in a slumpflation event because
of the inflation factor. In a recession by itself, the precious metals including gold tend to lose value. But
in a slumpflation with strong inflation a gold rally could come as investors look for an inflation hedge. Gold could
very well be that inflation hedge during slumpflation. The big question is: will inflation return in the face of the
current financial crisis and the recessionary threat. So far, the threat is strictly from recession and not inflation.