22
Oct
2008

Gold Investments Market Update – COMEX Gold Very Oversold; Dollar Very Overbought

COMEX gold continues to stink up the room after sharp falls in recent days as the dollar has strengthened considerably and oil prices fallen sharply. The technical damage sustained to COMEX gold has been severe and chart watchers are now tentatively looking to support at $750/oz.

Meanwhile the COMEX gold price is becoming less important to the setting of the physical gold bullion price internationally as shortages lead to much higher premiums being paid (both by buyers and sellers as retailers and wholesalers desperately try to incentivise sellers to sell to them so as to replenish their depleted inventories).

COMEX gold has now given up all of the gains of the last year and is back trading at levels last seen in October 2007. However, gold’s safe haven attributes have clearly been seen since the start of the credit crunch with the FTSE and the S&P 500 both down by more than 34% in the period and gold (in dollar terms) up by more than 16% despite considerable dollar strength.

The dollar is now extremely overbought especially given that the debacle on Wall Street is now likely to lead to a sharp recession in the US. The bailout of much of the US banking system and massive money creation is classic debasement of the currency and is very bearish for US bonds and the US dollar.

Despite this, sentiment towards the precious metals on Wall Street and in the media is bearish right now. There is simplistic reporting and constant references to how gold has fallen 25% from its ‘peak’ and failure to point out however that gold remains up by more than 16% (even in dollar terms) since the start of the credit crisis – unlike the vast majority of other asset classes. It is worth remembering that gold was trading at just $650/oz in August 2007 when Bear Stearns collapsed and remains up by more than 115% (in dollar terms) in the last 5 years.
Gold’s performance in euro and pounds has been even more impressive since the start of the credit crisis. Gold prices in pounds have risen from £330/oz to £461/oz for a return of over 39% in the period. Gold prices in euro have risen from €475/oz to €586/oz for a return of more than 23%.

The bearish media reportage and commentary is likely a good contrarian indicator that we are near to a low in this recent correction. However, for those with short term horizons we have constantly cautioned about the risk of “catching a falling knife”. Markets tend to ‘trend’ in any given direction for longer than participants expect. Leveraged speculations are not advised in the current unprecedentedly uncertain environment. Those with long term horizons should continue to take this opportunity to continue to be diversified and keep a healthy allocation to gold bullion.

Those who have diverted savers and investors from making this essential diversification are putting their savings and investments at risk. Some before said that gold was overbought at $1,000/oz and now say that gold will “collapse” to below $700/oz. They will likely be proved very wrong given the confluence of so many bullish supply and demand factors resulting in gold back at new record highs in the coming months.

The bottom line is that nobody knows the direction of any market in the short term and therefore now more than ever it is essential that investors do not merely pay lip service to diversification. Real diversification involves having an allocation to investment grade gold bullion as owned by the central banks of the world as seen in the Daily Mail article in our news section today:
http://www.dailymail.co.uk/news/article-1079518/The-Big-Picture-This-vast-vault-gold-Bank-England-weather-credit-crunch.html

Rock solid: Several thousand 28lb bars of 24-carat gold stored in the Bank of England’s massive underground vault.

Mark O'Byrne
Executive Director