Is Gold starting its Bull Phase? We believe so looking at the data and market atmosphere. This report summarizes our view on the Gold sector.
Recap
This sector was avoided since we called to exit it in September of 2011. In our market update of February 2012, we stated that after the highs of $1900USD/oz were reached it has been in a bear market and no signals were given from us even at the $1800 level which had a rebound. We warned that speculators should be aware as once it breaks below the $1500 level then the target would be $1200. In fact in 2012 we had a target for gold to be $960 (50% of the highs of $1920). So currently at $1008 does one enter this market or not?
Key Points from UBS
- Worldwide stock markets are correcting and currently the US Dollar is strong. However, there are not many more times where interest rates can be raised. Can the US Dollar continue to be strong?
- Worldwide government debt is very high which will affect their currency credibility. The higher the debt, the higher the chance of government default which leads to degraded currency credibility. The US Dollar and the US government have the same problem, however it is still not as bad as other governments and worldwide money still flows to the US.
- The US Dollar may finish its bull run in 2017, and by that time gold may be more favourable.
- The price action of gold since 2011 has confirmed a bear market cycle and is expected to bottom out this year according to its 8-year cycle.
Commentary
The 8-year cycle (Fig. 1) is not accurate if you ask me. Each 8-years are marked since the 1970s. However strictly speaking there is no guarantee of a definite bull cycle as if you take 1993 for example you would have had a loss. Therefore these so called seasonality strategies should always be taken with a grain of salt. Our track record has been better, selling out at $1900 and not entering the market until possibly now at $1080 (Fig. 2).
Fig. 1 – 8-year gold cycle (Source: gold-eagle.com)
Fig. 2 – Gold Price from the highs of $1920 until Jan 15, 2016 (Source: Stockcharts.com)
Fig. 3 – [Previous Update] 2013 Summer Gold Price Action. Channel broken (Source: goldprice.org 2013)
Strategy
- In 2012 Q4 our target for the price of gold was $960 if it broke the bottom of the channel (Fig. 3). Commodities either do not drop or drop a lot. The current level $1080 (Jan 19, 2016) is near the target of $960.
- To determine there is a bull phase for gold, we believe ALL of the following must occur:
- US Stocks fall and the US Dollar rises
- Other currencies fall
- Gold price does not fall, or rises slightly
- Gold stocks rise (Time of writing is Jan 19, 2016)
- GG – Goldcorp Inc. (Fig. 4)
- ABX – Barrick Gold Corp. (Fig. 5)
- EGO – Eldorado Gold Corp. (Fig. 6)
- It is observed that these 4 points are starting to occur.
KEY: Use Regular Savings Then Once Trend Confirmed Use Lump Sum To Switch In
Fig. 4 – Goldcorp price action (Source: Stockcharts.com)
Fig. 5 – ABX price action (Source: Stockcharts.com)
Fig. 6 – EGO price action (Source: Stockcharts.com)
Discussion on Gold ETFs vs. Gold Funds
Which would you use to capture this sector?
- GLD ETF only holds physical gold, no stocks or anything else.
- Gold Funds hold stocks such as ABX, producers, suppliers etc.
- From the previous high it can be seen that an ETF such as GLD Gold SPDR Trust corrected -44% (the actual price of gold) (Fig. 7 ) when compared to a stock such as ABX Barrick Gold which corrected -87% (Fig. 8). There is a difference because stocks build in expectations.
- From a strategy perspective we choose gold funds (because of stocks) and this is why:
- Looking at the highs (Fig. 9) GLD makes new highs with the price of gold at $1920, yet ABX does not make a new high. Conversely GLD rebounds sharply to the previous high, yet ABX makes new lows.
- The reason is stocks price in expectations and during that time the market was forecasting gold to head lower to $1800 the year after so traders act sooner than later.
- KEY: Currently we are at the other end. If we zoom into ABX (Fig. 10) the price is rising from the lows of $6.0 to around $7.0 (Time of writing is Jan 19, 2015) whilst the worldwide markets are correcting around 20%. It is observed that the price of ABX is rising because people are pricing this in as an alternative safe haven to US Dollar for the future.
- This maybe coincident with what UBS said earlier with Gold being a safe haven alternative to the US Dollar in 2017.
Fig. 7 – GLD Retracement (Source Stockcharts.com)
Fig. 8 – ABX Retracement (Source Stockcharts.com)
Fig. 9 – Spot Gold, GLD, ABX as new highs and rebounds are seen. ABX pricing in expectation (Source: Yahoo Finance)
Fig. 10 – ABX price rising as worldwide markets correcting. Pricing in expectation (Source: Stockcharts.com)
Conclusion
In identifying any potential market, our strategy involves looking at previous highs and also how large the corrections were to ensure a low price entry for maximum risk-reward. Apart from technicals and charting, fundamentals and market atmosphere are also evaluated. From there, funds and instruments are chosen to capture that sector. Generally regular monthly savings are suggested first, and once the bull phase is confirmed the lump sum switch-in occurs to try and lock in at a lower price. This may be done in 1-3 lots.
As this service is about fund portfolios, the following funds are pre-chosen for Portfolio Beta (Note: Portfolio Alpha does not contain gold funds in the list of fund choices).
Alert: BlackRock World Gold Fund & Investec Global Gold Fund will be used in Model Portfolio Beta to capture this sector
We will continue to monitor this sector for developments.
Best,
Michael
