Gold: It's Time to Sell – Not Buy! Here's Why

While investors are piling into gold [a number of]  independent international financial consultancies are suggesting that now is the time to be getting out of the gold market. [Here are their views.] Words: 897

Unless the world experiences larger economic difficulties than those at present, I believe gold should only be purchased by investors with a very negative view of the future of the economy in the U.S. and Europe. For me, gold should only be sold at these prices, not bought.

Green has a point. As gold rages through…US$1,800 a [troy] ounce investors should be asking about the quantum of the upside and whether…[they should] cash in on the rally. At the heart of the recent gold rally are fears over the health of the developing world’s economies. The emerging economic crises in the eurozone and the U.S. have diminished confidence in currencies and the markets forcing investors to move their investors into “safer” assets. Green went on to say:

Recognised usually as a safe haven, gold is currently seen as an alternative currency, an investment trend prominent especially in these times of economic unrest. However, experts are now divided as to whether to continue to invest in precious metals or to plough money back into the markets.

Why Is Gold Being Bought?

1. Currency concerns: Most savvy investors are steering clear of currencies [and investing in gold because] it is currently seen as a lower risk investment by comparison to some currencies. The risk [in doing so, however,] is that while gold, which is mirroring the health of the markets and global currencies, could rise if uncertainties continue or even deepen it could [also] plummet if markets start to recover and confidence in currencies increase. This could also happen overnight – literally.

2. Low opportunity costs: Nedgroup Investments head of investments Matthew de Wet said another factor undoubtedly driving the gold price higher is the fact that the current opportunity cost of holding gold is low because interest rates are near zero in the U.S.. In other words, the income you forego by taking your money out of the bank and buying gold is negligible.

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3. A hedge against inflation: De Wet is of the opinion that there are other asset classes that can more reliably protect investors from inflation, most notably inflation-linked bonds [although he acknowledges that] the real yields these offer are currently low and their inflation beta, or sensitivity, is also low, meaning one needs to hold quite a lot of them in a portfolio to help protect it from inflation. Gold typically has a much higher inflation beta of six to eight times, as do other commodities, which means a little goes a long way in the event of unexpected inflation.

Are We In A Bubble?

Gold might, however, continue to soar…[but] as Kurtis Hemmerling, writing on Seeking Alpha, says, an emotionally-priced commodity presents dangers as well in that “parabolic moves often have nasty downsides” going on to say:

If investors begin unloading when prices rocket up to US$2,500, or wherever it settles, how will central banks react? With the U.S. having 74.2% of its reserve in gold, Germany at 71.4%, Italy at 71.2%, and France at 66.2%, how will they take a panic drop, if that should occur? If they begin to broadly sell in the attempt to preserve necessary sovereign value – it could get very nasty.

What is worrying is that gold’s price action suggests that the market remains impatient and sceptical. According to Ross Norman of London based bullion brokers Sharps Pixley.

We do hold to our view that gold is in overbought territory technically. Long term investors looking at a 30 week trend for gold will have seen gold extend 20% beyond its trend line only 3 times since 2007 and in the last 2 occasions (March 2008 and December 2009) it sold off sharply and reverted to its mean. We are there again today at 21% above the trend.

We are presently beyond the upper limits of the [Bollinger] bands again. Such bands show the deviation of prices from 20 period average points on a weekly chart and suggest that gold is technically overbought. These guides tell us gold is due a rest.

Are we in a bubble?  Our view is that we are not but the potential to be so is very much there.

*http://www.businesslive.co.za/southafrica/sa_markets/2011/08/17/time-to-sell-not-buy-gold-the-devere-group

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3. Gold Will Drop to $1390 By Year-end and $1000 by 2013! Here’s Why 
4. The Future Price of Gold and the 2% Factor
5. Jim Rogers: Stop Buying Gold! These Other Commodities are a Better Buy!

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.