Gold up $200 in 1 month, will China support it?

On 29 December 29 gold was selling for $1,523 today its around $1,723.

On December the 28th I nearly bought back all my gold shares but thought the price would fall further. I was right (and therefore thought I'd always be right), it did fall, but only for one day and I didn't buy it on that day either - then it started it's most recent rally.

I'm deciding what to do next. Should I bite the bullet and get back on again? This guy (Nigam Arora) thinks that investors were making a mistake in seeing the Federal Reserve statement as a buy signal. But that's a lot of wrong people! Bloomberg reports 9 out of 15 gold traders expect gold prices to rise next week - which starts with a summit of 27 countries of the EU about growth and jobs buy 17 eurozone countries could break off to discuss Greece.

Another indicator of how this rally will go will come from China after its New Year holiday according to a report from UBS analysts reported by Mineweb. UBS said: "It will be interesting to observe China's appetite when markets there reopen after the one-week Lunar New Year break. For although physical markets naturally prefer cheaper prices, Chinese buyers by and large prefer to buy into rising momentum, while taking advantage of hefty pullbacks. That has been the pattern in recent years, but it was always grounded in expectations of higher prices ahead. So the returning Chinese participants need to believe that this is the start of something larger, otherwise they'll sell the rally."

At 2pm 10 PHAU shares would cost have me £1,088.60. My BlackRock Gold and General units are about level. 

My issue is whether gold will behave as an insurance for my cash. Is that likely if the price of all assets is rising? Although I'm sure it's not a valid argument the chart below shows everything moving in the same direction at the moment and the Bloomberg article linked above lists all asset classes rising except sovereign debt.

Some reading on gold, Iran and the petrodollar - stuff I didn't know but may be should have via Plan B economics.

Pain and confusion for gold doubters like me

As far as I can tell there are two ways of dealing with confusion. One is to do nothing except wait and watch and hope that some kind of decision or useful act emerges from my brain. The other is to do something, anything, and hope it provokes some similar kind of clarity.

I tried the latter one - the acting - back in December and sold everything. Then I decided to switch back into the second one - the waiting - and do nothing. Unfortunately I think I made that switch when the opportunities presented by having cash had just appeared (gold around $1,550 per ounce)... but I didn't take the opportunity, not because I was unsure, but because I switched back into a waiting.

If I've interpreted my mental state right, the switch from acting to waiting took place subconsciously.

Now I'm aware that I'm in waiting mode I think I better learn from my earlier mistake and not move back into acting without properly examining the whys and, more importantly the whens.

As discussed in previous posts I still don't know what I'm doing - or what my motivations have been for doing what I've done so far. That uncertainty exists in equal measure in my personal financial situation (I don't know if I can afford to do this) as well as the gold market itself (I don't understand how it works).

So what is the motivation then? Well, rather than writing it off as some stupid ill-thought-out exercise that has cost me £250 I need to think of the positives. Like for example I am reading Marx and I understand better how currencies work on investments and I think I am working out how to make decisions.

However, all of this is clouded when things happen like they did today - the investment that I don't own, PHAU (ETF Securities Physical Gold exchange traded fund), gained more than 3% after the Federal Open Markets Committee (FOMC) statement said that US interest rates would stay low til the end of 2014.

But does that really explain this move? Michael Hewson at CMC markets said the tone was only slightly more dovish than had been expected. So was it a flash in the pan? Well not according to Scott Redler, chief strategic office at T3Live.com, who told the Street that the rally happened on strong volume, which is bullish for gold despite the fact that much of it came from short covering. "A big move on heavy volume through a downtrend is bullish." Redler is now looking for higher prices in gold (but over what period - he was one of the guys talking about gold at $1,400 when gold fell sharply in December. I need to get my head around how views like his - and mine - have to change as the market changes).

Low interest rates means that the cost of owning gold falls (in comparison to holding cash). And some commentators* say that, low interest rates are naturally inflationary (I'm thinking because more money is floating about the system pushing up prices - which encourages people to exchange stuff and boost the economy).

*Phil Streible, senior commodities broker at RJO Futures told The Street: "Inflation will be created ... [the Fed is] artificially creating inflation for the next couple of years."

Low interest rates, higher inflation, are both good for gold, not so good for someone who doesn't own gold.

But I'm in waiting mode. Everyone expects gold to be volatile in the first half of 2012, may be that means it wont be. However I'm holding out for lower prices at some point and hopefully working out more about gold during that wait.

If I bought today I'd get 10 PHAU shares for $1,086.79 after adding £11.95 trading costs

How does that compare to previous buying and selling? Between 22 September 2011 and 16 December I paid £3,058 for 28 PHAU shares with purchases on three different occasions:

On 12 December 2011 I bought 10 shares for £104.58 each - £1,057.74 in total (after fees).

On 4 November 2012 I bought 10 shares for £108.01 each - £1,092.10 in total (after fees).

On  September 22 I bought 8 shares for £111.98 each -  £907.78 in total (after fees).


On 13 January I was thinking about buying 10 gold shares for £1,062.52 in total (after fees) which is not much worse than my current best buying rate on 12 December. 

But I'm hanging on. If I'm making a mistake at least I'll know it at some point.

Wait for a real gold volatility shake out?

I only ask because before the weekend Bloomberg interviewed currency fund manager and gold bull Axel Merk.

He said: "When gold is volatile, we like it. I don’t like that the volatility is so low now. When volatility is high you have only folks who want to own gold for the long term. The momentum traders get out because they can’t handle the volatility.

"When volatility increases, we tend to go into gold. Last summer we took some profits as gold was going up, and we came back into gold a tad too early."

In this piece back in September 2011 Ben Traynor at BullionVault said: "Back then (2008) you had daily price swings – taken as the difference between the PM London Fix price one day to the next – coming in above 4%...above 5%...and, on two occasions (18 Sep. and 24 Nov.) even over 6%. In a single day."

This chart takes the LBMA gold fix daily percentage changes in 2011 (black dotted line) versus 2008 (red line). When I get a chance I'll try and work out how to calculate z scores and how to interpret them.

In the meantime I'm still waiting for a buying opportunity....

Here's what happened to PHAU and PHGP last week: 

BBC discussion on return of gold standard with Angela Knight, Detlev Schlichter, Philip Coggan, Lord Glasman

While waiting for the price of gold to fall I was listening on-and-off to Andrew Marr on Start the Week.

I missed the start so here's how the BBC described it: "Detlev Schlichter dismisses the practice of printing more money in times of recession, arguing that in the next decade our reliance on paper money will collapse, and he proposes a return to hard commodities, like gold. The historian Philip Coggan pits creditors against debtors, tax payers against public sector workers, and believes it's time for a new monetary system to emerge. The Labour peer, Lord Glasman thinks we need to change the relationship between parliament and the market. And Angela Knight sticks up for the bankers, insisting they hold the key to the crisis, so deserve both a bonus and a bit of respect."

http://www.bbc.co.uk/programmes/b019f8b5

Hopefully no one will read this far - but also to help pass the time I've been reading Karl Marx's Capital. His description of how commodities work is sort of sinking in. A lot of it is about gold. I'm not sure it's a great help in terms of investment advice or how widely accepted his description of commodities exchange process would be any more, but its the most fundamental description of where value comes from I've seen. But then I haven't looked very hard.

More navel gazing at Gold ETF Investor: saver, trader, investor?

Comments in the last post suggested that I only buy on 'red' days... like today.

But I'm still not ready yet.


Part of this is because I still believe the price could fall further but this isn't really an excuse anymore, I should have a longer term view. So I'm doing nothing while I work out what I should be doing, for how long and with how much money. (Although, if I'm honest, I know I'm also delaying in the hope the gold price will fall and make a decision to buy easier - and I can't quite accept that this may not be a good idea.)

So for now I'm just gathering up what people claim is going on and views on how and when to buy gold.

What's happening today?


Why is the price going down today? Here's Reuters view  with comments from Michael Lewis, analyst at Deutsche Bank saying current price moves don't have much to do with fundamentals and a note from UBS analysts which expects Chinese demand to fall.

But recent figures on Chinese gold imports have turned most gold traders positive according to Bloomberg.

Gold ETFs seem to be have been down all day in various forms

With the US dollar version looking a little worse as the dollar index rose.

What would I get if I bought now and how would it compare to previous buying and selling?



Between 22 September 2011 and 16 December I paid £3,058 for 28 PHAU shares with purchases on three different occasions:

On 12 December 2011 I bought 10 shares for £104.58 each - £1,057.74 in total (after fees).

On 4 November 2012 I bought 10 shares for £108.01 each - £1,092.10 in total (after fees).

On  September 22 I bought 8 shares for £111.98 each -  £907.78 in total (after fees).


If I bought today I would get 10 gold shares for £1,062.52 in total (after fees) which is not much worse than my current best buying rate on 12 December. 

But I think I'm going to hang on for now for academic reasons.




My BlackRock Gold and General fund is back to where it was before the price gyrations although...

I did buy a bit more back on November 24 and 25 which didn't match December lows but wasn't such a bad move as my ETF sale may prove to be 

Food for thought on when and why to buy gold

Bill Bonner, writing in Money Week on 6 January said: "And how about gold? Buy it when people predict it will go lower, not when they expect it to rise. Of course, you don’t know where it will go. But when people think it is going down, odds are… it is cheap."

He also said: "We explained yesterday, we don’t think gold is going to go up this year... even so, we should probably expect it to go up again. Because the danger of thinking it will go up is far lower than the benefit of thinking it will down. We don’t know where gold is going in 2012 but the rest of the monetary system could slip into chaos and calamity at any moment. Gold is the only thing we can depend on."

He gave more on prices in an earlier Forbes article where he thought gold could still fall back to £1,200 but I'm not sure if these are still relevant post the December lows.

"Gold is not too cheap at $1,500. At $1,900 it was too expensive.... In the meantime, we’ll probably see a further correction in the gold price…perhaps down to $1,200. Or, perhaps it will stop at $1,400. We don’t know. And it doesn’t matter. Buy gold on dips; sell stocks on rallies."

When Jeff Lewis interviewed Grant Williams (pointed out in a piece by Bron at Gold Chat), he also mentioned the threat of a $1,200 low but I don't know if it still stands since the pre- New-Year lows.

He said: "I suspect going into 2012, the set up for both precious metals is bullish providing they can hold these levels and I think that is important to know. A lot of very good and well-respected chartists worry that gold could correct to 1,200 to 1,400 bucks. And certainly, if you look at the technical pictures, that could happen. Silver could correct down to the low-20s; it absolutely could happen. But it’s important to decide whether you’re a trader or whether you’re an investor. If you’re investing in silver and you’re investing in gold, based on the fundamental reasons to do so, then falls to the price aren’t that much of a problem for you because they give an opportunity to buy more metal at cheaper prices. If you’re a trader, it’s a whole different world and you have to be very agile and you have to be very attuned to moves like this that could go significantly lower.

But then on 3 January 2012  John Embury at Sprott Asset Management told King World News: "When gold broke through $1,000, I said it would never trade below $1,000 again and it hasn’t. I now think that, unless we have a complete and total financial collapse in the world, I would be surprised if gold ever traded below $1,500 ever again."

Identity crisis at Gold ETF Investor

The first comment to appear on this blog has caused an identity crisis! It's not the first identity crisis here, but it's the worst so far.

I thought I was being matter-of-fact about my approach here but I can't really justify much of it to Jeanne D’Arc who provided some much needed constructive criticism. I'm still attempting to put together a coherent response.

The key observations were: “You're not behaving like an investor at all. You're speculating. Worse, you're gambling. You keep trying to pick the short-term direction of the market, and probability says you can only be right 50% of the time. Sod's Law says it'll be less than 50%.”

And yes, that’s what it looks like, but it didn’t feel like that at the time! I’ll try and explain myself.


The advice:

1. "Do your research and try to identify a market which you think is in a bull phase. Gold appears to be one such market (it certainly has been for 11 years). Then invest in it. And sit."

2. "Once you've made your play, don't sweat the day-to-day up and downs. You're an investor! If you're confident that it's a bull market, then you should be confident to wait for your return in one, two or three years, or whatever."

3. On the question of buying back in Jeanne said: “your only question should be: will gold be higher in one year's time? If it's no, then think about shorting the market. If it's yes, then buy (on a down day!) and sit it out. This advice goes for anything - gold, oil, bank shares, bonds, whatever.”

But I haven't bought back in and I don't know if gold will be higher or lower in a year! So what am I doing looking at gold as an investment?

I hope that the time I'm taking to answer this won't turn out to be an attempt to rationalise my way around these genuine issues. The problem is that I don't think my case is totally straight forward but that's probably what everyone thinks.

I'm finding this recent post by FOFOA helpful: The Studebaker Effect

It starts off with these gentle encouraging words:

"I never want anyone to invest in anything based merely on a recommendation. I want them to understand the reasons for the purchase themselves. Peace of mind can only come from within, and that's what understanding can provide."

I don't have that peace of mind yet.


"Have you noticed how many people think they are traders and investors these days? And with all the options to invest in and trade out there, who can blame them? But in reality they are not traders or investors. They are doctors, lawyers, businessmen… and savers. What we call investing today is more like speculating. So why do we "save" the way we do today, by speculating on things we know so little about?"


"A saver is different from an investor or a trader/speculator....

(But)

Today the system is in transition, so you can throw your ideas about these differences out the window. There is no safe medium for simple preservation of purchasing power when the entire system shifts from the old normal to the new normal. When systems implode, the safest place to be pays off big time!"

I'm hoping to work out where I stand on these things too. Meanwhile the gold price moves up and I don't own any.

Gold gains more than 1% but will it continue?

The gold price gained more than 1% this morning. It's a bit unnerving for someone waiting on the sidelines hoping the gold price will fall far enough to justify selling in December.

But here's what seems to be happening today: the euro rose against the dollar but commentators tell Reuters it's not a longterm trend and Indians started buying gold again (Reuters again).  I try to get my head around both of these issues below  - the Indian buying story may not be a longterm one yet either.

But it seems no one really expects much real movement on Europe until the results of Spanish and Italian bond auctions on Thursday and Friday. Is there any reason to buy gold before then?

Well the gold price shot up today:

The gold ETFs I do not own gained too -

As the falling dollar played a big part in the gain any changes in the pound sterling denominated PHGP looks a bit less impressive/painful and these are the changes you'd get if you owned PHAU, the dollar version anyway - which is what I'd buy. The Bloomberg dollar index chart shows the dollar moving lower. (Reuters said this was due to short covering on the euro:"Traders said there was no fundamental reasons for the short squeeze in the euro with news out of Europe continuing to paint a dreary picture.")

The pound moving in the same direction as the euro - up today (the green figures above the chart) but moving downwards over the last month (the chart). It's opposite relationship to the dollar is likely to get stronger? (Reuters story: )




Adding to a list of gold watchers who think the price of gold is more likely to fall than rise in the short term appears to be Perth Mint's Bron Suchecki (also Gold Chat) whose negative views included the effect of MF Global: "This is not necessarily negative in the long run, as these investors may instead opt for direct physical investment, but in the meantime any contraction in leveraged paper positions puts pressure on the gold price."

The other key factor he cites is Indian gold demand: "Physical Indian ounce demand will return eventually but in the short run the situation  continues to be negative, with Reuters reporting Prithviraj Kothari as saying "Still prices  are high. Interest rates are high. Liquidity is tight. I think imports in the first quarter of  2012 will be 50 percent lower than last year."

Although he adds that there is some pick-up of bar demand and that a change, when it comes, will be very fast.

Just this morning Reuters said dealers in Mumbai said a drop in local prices to a one-week low was used to stock up ahead of wedding season beginning later this month. Harshad Ajmera, proprietor of JJ Gold House in Kolkata said: "Buying will continue until March."

It also said India's central bank has allowed four more banks to import precious metals which would boost competition and help reduce premiums.

In the same report Reuters quotes Macquarie analyst Hayden Atkins who said "A big part of the weakness into the end of the year was people taking profits and liquidity being a bit lower."

He said that the end of this process might explain why an inverse correlation between the dollar and the euro/gold.

"I would expect that to unwind, and maybe that's why we're seeing stronger gold even when the euro is tending to weaken. You don't have that length there any more." He told Reuters he expected gold's inverse link to the dollar to drive prices in this year.

Gold price falling on Monday

Some newer negative views: updated Monday 9 January afternoon.


Mineweb including comments from Marc Ground at Standard Bank: "the speculative market remains wary of gold's prospects."
Jim Wykoff remains a gold bull and also believes that it will start behaving like a proper safe haven soon but said the rise of the dollar and "the bulls have more work to do in the near term to suggest an uptrend in prices can be sustained. Prices are still in a two-month-old downtrend on the daily bar chart."

TF Metals sees gold possibly heading back towards $1,565.
John C Burford thinks it may go as high as $1,640 before falling again
Clive Maund expects the price to fall a lot further
Jeff Clark just says the bull case still intact but expect volatility
GM Jenkins on Screwtape files says: I'd be surprised if this is a good week,

Jenkins had some interesting thoughts on conspiracy theory stuff too after signing up to GATA's "Le Metropole Cafe" saying: "I kind of looked forward to hammering them here for talking shit with such confidence, but they turned out to be dead on. Let's see how they do this week."

Where I stand

Should I buy back at least as many physical gold ETF shares I sold on December 16? Am I still waiting for the price to fall?

Is it still a good hedge against the value of my home and the health of the UK economy?

I think the answer to these may still be yes but none of my views are written in stone. This feels like it will be a slow process of building up experience. For now I will try to play safe, just so I can find out if there really is a safe way to play.

I have already lost £250. I don't have a great deal of cash to play around with and I want to survive for as long as possible.

I am also trying to keep my thought process as simple as possible so I can keep track of them.

The temptation is to go with each new idea as it arrives which I do at every opportunity because it diverts me from the reality of what I am doing and the decisions I need to make.

If I reinvested now and the price rose I could make back some of my losses. Even if the price fell a bit I could justify buying now because most analysts still think gold will go above £2000 some time this year.

But I don't feel that this is the safest bet because it would mean buying back my gold and risking more losses.

Why do I see this as riskier than missing out on sudden rise in the value of gold? It's because I think recent price moves show it has been safer to be out of the market than to be in it.

The gold price hit a low of $1,523 on December 29. That wasn't as low as some commentators had  been expecting -  some saw it going as low as $1,200 but more likely $1,400 (see below).

In sterling terms PHGP, the physical gold ETF priced in sterling, fell to a low of 9711.7p. On Friday last week it closed at 10,320.5. That's a 6.2% gain.

I sold my gold ETFs (the dollar version PHAU) on December 16 and was left with £2,809 of an original £3,057 investment (a loss of £248 or 8% since September 22 when I made my first investment.

But I didn't sell at the absolute worst time.

If I had held onto those shares they would now be worth £2,899
(10,320.5 x 28 (the number of shares I originally owned) = £2,889)

That's only a gain of around £80. So if I had held onto them I would only be up 3% on the current position.

But I don't think that is a sensible way for me to look at this.

I sold my shares so my position changed. In my view I am safer.

Now I need to work out what I have done and what to do next. Some of this will involve finding out where I have made mistakes or missed opportunities. But I suspect I don't have the experience to do that usefully yet.

I don't think selling was a mistake because the gold price fell. I just failed to buy back before the prices rose more than 6%.

The question now is whether I see still see that decision not to buy back my shares as a mistake?

Either I still believe the story that the gold price will fall or I need to take a new position. If it is the latter then I need accept my losses and start from scratch again - ie reassess my views on whether the price of gold will rise or fall and whether it is a good hedge against the value of my home and the health of the UK economy.

The fact though is that I don't know if I am continuing an old strategy or starting from scratch.

I don't know how to make that decision because I am still learning and still relying on others for direction, probably too many others.

A lot of different people have put together a lot of different stories about why the price has moved as it has.

Gold price was dropping in early trading.

The original views I followed when I sold.

Scott Redler, chief strategic officer at T3 Capital interviewed on Bloomberg pointed out by Plan B economics, said gold was in an identity crisis adding that it could fall to $1400 or even $1,200.

Jim Sinclair and Eric de Groot think gold will rebound and engage with some of the bearish views like those of Martin Armstrong: "The fundamental mantra about fiat currency is getting old. The market is poised for retest of the 1225-1325 area going into 2012 which is the key support."

Dennis Gartman in Forbes: "He explained when gold collapses or falters into that $1,300 to $,1400 area, and if it shows sign of holding, then he’ll probably get his feet wet again on the long side and be a buyer.

Holding on and not buying yet... a bad idea?

I still haven't bought back any gold ETFs and the price of gold is notching up higher. May be a mistake but I've got to make a few.

Yesterday Dennis Gartman told CNBC he should have bought when the gold price fell between Christmas and New Year.

But others, like Jon Nadler of Kitco reckon gold will hang around $1,600 and could go either way and is waiting for eurozone bond auctions next week and also to find out how much funds will be buying when they reallocate on 7 January (I don't know what that's about).

Earlier in the week Anthony Neglia of Tower Trading expected gold to carry on downwards and wasn't yet looking like a safehaven. But said above $1,625 could be the start of a bigger rally.

It hit $1625 a couple of times today. But eurozone and jobs data from the US could make Friday interesting - there was already some good jobs data on Thursday.

BullionVault: Another gold price rollercoaster