Should you go contrarian on Gold?

This time, last year, almost all believed the metal would rise through the year. Analysts issued an average price forecast of $1,753 per troy ounce. Instead, gold averaged $1,411, suffering its first down year in 13 and worst year since 1981. By New Year’s eve the price was $1,202.

Gold ETF (USD):

Gold ETF (INR):

GOLDBEES

Investment demand for physical gold fell 25% last year. ETFs that keep gold in vaults on behalf of investors have dumped nearly 30m ounces from a high of 84.6m ounces at the end of 2012.

Currie, Goldman Sachs’s head of commodities research, had a target of $1,050 an ounce back in early October. The biggest gold bulls have abandoned ship. Paulson told clients at his firm’s annual meeting Nov. 20 that he personally wouldn’t invest more money in his gold fund. Billionaires George Soros and Daniel Loeb sold their entire positions in the SPDR Gold Trust exchange-traded fund in the second quarter.

Given so much hatred about gold, should the contrarian investor jump in? No. The odds of runaway inflation is low, equity market returns are likely to be more attractive compared to gold’s in the near term and investors are still in the process of pulling money out of gold funds. There will come a time to challenge the bearish thesis on gold, but investors going long right now could end up being too early.

GOLDBEES 2,545.00 16.25 (0.64%)

Source:

Gold bulls lose faith in bullion’s allure
Goldman’s Currie Says Gold Is ‘Slam Dunk’ Sell
Paulson Said to Inform Clients He Won’t Add More to Gold

Gold: The New Normal

Credit Suisse published a report - Gold: The Beginning of the End of an Era – back in February. The basic thesis was that the peak of the fear trade has now passed and that against any sensible benchmark gold still appears significantly overvalued relative to the long run historical experience. Its important to keep the bigger picture in mind before you rush to buy the dips.

Here are some charts from the same report.

Long run gold price, real, 2007 dollars

The real price of gold (2007 dollars) remains at an extreme level

Gold is still near the long run highs in terms of base metals

Is gold really an inflation hedge

Gold is trading 3 standard deviations below the exponential trend

 

TL;DR: gold is expensive, has broken its uptrend and is a poor inflation hedge (in terms of USD).
GOLDBEES 2,545.00 16.25 (0.64%)

Is a bottom in sight for Gold?

The price of gold in USD terms is approaching the cost of production:

gold

Simple logic would dictate that gold miners will start mothballing mines if its no longer feasible to mine and ship gold.

 

It will be interesting to see how this plays out in the days to come…


GOLDBEES 2,545.00 16.25 (0.64%)

Gold vs. Jewelry

Today’s collapse in Gold took down gold jewelers like Titan (-5.05%), Gitanjali (-2.98%) along with gold lenders like Muthoot (-12.71%) and Manappuram (-9.84%). I understand why gold loan companies might be in trouble if the downtrend continues. The biggest question being whether their customers can top up their LTV given that the collateral is down -13.81% this year? However, unless the jewelry guys got into some nasty hedging bets, isn’t falling gold prices a net positive to them?

Women secretly know that gold jewelry is a bad investment. Trinkets falls 30% in value the minute you take it out of the showroom. The investment angle was something that they use to make men feel better about blowing away money. The drop in gold prices actually makes it more affordable so I would expect foot traffic to retail jewelers would actually increase.

As price decreases, consumers will buy more of the good.

There are significant headwinds affecting gold. Chief among them the ECB’s pressurization of Cyprus’ central bank to sell its gold reserves to help pay for the country’s bailout. That has raised expectations that other distressed euro-zone members might be forced to sell gold as well. Other factors include bearish forecasts such as from Goldman Sachs, the slow improvement in the U.S. economy, and the perception that gold is no longer needed as a safe haven.

However, if you are with me on the thesis that, in reality, jewelry buyers are not buying gold for investment but for consumption, then the drop in gold prices are a net positive to jewelry companies.


GITANJALI 57.45 0.55 (0.97%) MUTHOOTFIN 183.45 1.20 (0.66%) MANAPPURAM 28.80 1.45 (5.30%) TITAN 395.50 5.55 (1.42%) GOLDBEES 2,545.00 16.25 (0.64%)

Analysis: GOLDBEES

Today’s pick is GOLDBEES GOLDBEES 2,545.00 16.25 (0.64%). The ETF started the year with an uptrend to reach 52 weeks high of Rs. 3,100 levels. This level proved to be a resistance, and the ETF saw a formation of double top by the end of November. Since then the ETF is in a continuous down-trend. In the last three months, the ETF has moved -7% vs. +5% of the Nifty’s.

GOLDBEES technical analysis chart

Oscillator RSI and CMO have been trading close to the over-sold territory since long, and are not giving any directional bias. The ETF is trading in the lower end of a very compact Bollinger band giving no directional bias. Short-term technical just saw 9×4 bearish cross-over.

The MACD line and signal line are moving parallel to each other, unable to give any outlook. Also, Long-term and short-term GMMA lines are running close to each other and are not giving out any directional bias.

GOLDBEES correlation chart

GOLDBEES’s average correlation with the Nifty is -0.02 which is negative. The scrip will not be replicating movement of Nifty. NIFTYBEES 807.00 9.66 (1.21%)

GOLDBEES volatility chart

GOLDBEES has a historical volatility in the range of 0.1 to 0.4. The scrip’s volatility is currently in the lower end of the range.

Given these technicals, we suggest a short-term sell. For the long-term we could take a call based on the ETF’s behavior around Rs.2,700 support levels.