Should Investors Hold Out for $1,300-an-Ounce Gold Before Investing?
When I previously wrote about gold, prices were around $1,316 an ounce and subject to a bearish head and shoulders formation on the charts, as you can see below. (Read “Why Gold Might Only Be Good for Traders Right Now.”) I was bearish on the precious metal then and continue to be so, at least when considering it as a buy-and-hold investment rather than a speculative trading opportunity.
Spot gold has fallen below $1,225 and appears to be set to take a run at the key support level of $1,200, according to my technical analysis. The reality is that even with the 7.5% decline from early October, I would still not be a buyer at the current price, unless I wanted to trade the yellow ore and hope for a possible oversold technical bounce back above $1,250.
Chart courtesy of www.StockCharts.com
Instead, given the attractive buying opportunities in the stock market, I’d advise more conservative investors to invest their dollars in stocks, rather than gold bullion at this time.
Some of the underlying fundamentals that have traditionally supported the metal are not evident. Yes, China is continuing to accumulate physical gold, but buying by India, which is the world’s largest buyer of the precious metal, has been stalling.
In addition, the yellow metal usually receives a lift from a weaker U.S. dollar. With the greenback showing some recent strength against other world currencies, especially in the emerging markets, the precious metal isn’t seeing any support from a weak dollar.
Inflation, a historically supportive variable for the precious metal, has also been largely benign across the world economies (with some exceptions). Without inflation rising higher (in spite of the exorbitant amount of easy money being pumped into the global economy), I just don’t see why anyone, aside from speculative traders, would buy the precious metal at this point.
Traders may begin to look at gold as a speculative trade if prices head down toward $1,200 and below, as shown on the long-term chart below, which dates back to 2004. There is some decent support around $1,200, but the problem is that a failure to hold could see the metal fall towards $1,100 and $1,000, as shown by the lower blue horizontal support line on the following chart.
Chart courtesy of www.StockCharts.com
So unless you are a persistent gold bug that has remained loyal to the yellow ore since the $1,800 level in 2011, I would be hesitant to add gold as a buy-and-hold investment; instead, I continue to look for opportunities in equities. If gold prices do bounce back toward $1,300, I might consider entering the market on the short side and sell gold, as the fundamentals, at this time, don’t appear to be there. In the current market, gold investments are most beneficial to speculative traders.
About the Author | Browse George Leong's Articles
George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »
Forecasts Aug. 30, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 30, 2015
|Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)||$1014.15|
|Trailing 12-month Price/earnings multiple (Most Recent Quarter)|
|Dow Jones Industrial Average Dividend Yield||2.71%|
|10-year U.S. Treasury Yield||2.14%|