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.

20 October 2011 gold ETF report: test of faith

Today my ETF Securities Physical Gold (PHAU) shares dropped 2.4%.

I'm not going to interpret the causes - some of them are discussed here (IB Times) and some more here (MarketWatch). The argument is that if gold isn't a fear barometer it's a useless investment for a while.

Where do I stand in this situation?

First the boring bit - deciphering what's happened to my PHAU shares. Then I'll assess whether I'm in enough pain to act and, lastly, whether I have enough knowledge to act sensibly.

When I bought the shares on 22 September I paid $172.734 per share (that's before adding the £11.95 I was charged to carry out the transaction.)

At the close of business today Hargreaves Lansdown would have paid me $158.03 for each of them. (The offer price was $158.22 per share.)

So my shares have dropped 8.5% in their dollar value - again that's before adding the cost of dealing.

Unfortunately that's the happiest spin my gold ETF story gets today.

When I bought the shares they cost £111.9787 each. There were 8 of them which adds up to £895.8296.

By the end of today - 20 October 2011 - my eight shares had a sterling value of £803.81 according to HL which used an exchange rate of $1.5728 to £1 to get this figure.

So in sterling, before dealing costs, my loss is £895.8296 - £803.81 and on that count I'm down £92 which equates to a 10.27% loss. That's a lot worse than the 8.5% dollar loss calculated above.

That appears to be because the pound has strengthened against the dollar (check this Google chart). It now costs me more to buy pounds with my gold ETF dollars than it did back on September 22.

At the end of 22 September £1 would have bought me $1.5358. Now, nearly a month later, my pound buys me $1.5728. That works out at a 2.4% increase in the purchasing power of my pound against the dollar. That has worked against me because my investment is in a dollar denominated asset.

If I wanted to sell now I'd have to include a £11.95 transaction cost which would come off what HL would pay me: so £803.81 - £11.95= £791.86.

When I first bought the shares I also paid £11.95, a total of £907.8 for my shares and so the difference between the entrance and exit price widens again. Now I would be exit with £791.86 when I spent £907.78 entering. A £115.92 loss or -12.7%.

So what do I do?

It feels like I picked a testing time to try out a 'leap-before-you-look" investment style in gold. But where does my faith lie? Should I sell and wait til things get better? Or should I hang on?

I'm a financial journalist of sorts (out of work at the moment!) and I've written about gold related investments for a while. This generally involved passing on various people's views about the price of gold and silver.

It's embarrassing but while writing about it, it didn't cross my mind to ask such a basic question as: "Where does the price of gold come from?"

But when I bought physical gold ETF shares it was an obvious hole in my knowledge because my investment tracks the "spot price" of gold.

Adrian Ash, head of research at the BullionVault helped me work towards an answer in this piece: Is the gold "spot price" real?

Then today I read some of this blog "Gold Chat" and was relieved to find out that it's quite common for people to take the construction of the gold price for granted. They don't realise that it's an issue until they buy the stuff.

Bron, who works at Perth Mint in Australia and writes Gold Chat said: "It was always amusing to me when clients would ring up to buy and we would quote a price and then, naturally, they would say “Well, where can I get what the spot price is?” so they could work out if our price was “fair”. The answer was, “It doesn’t exist.""

I expect there will be lots more surprisingly basic (or stupid) questions I need to answer before I get comfortable with the product I own, let alone the gyrations of the gold market.

On that front Bron is a reassuring read for people left confused and worried by the daily shifts in the gold price - look at the day trading section of the Investment Time Frames section. I feel like this has provided me a bit of space to work out what my motivations were for buying gold in the first place. I'll be looking at Gold Chat's investment time frames: part one and part two to start off with.

I don't know what I'm doing but, at the moment, owning gold has forced me to pay attention. I don't think I'd be interested if I wasn't invested enough for this to be a painful experience.

I'm not interested in diversifying until I have a better grasp of what I've already got - although I do own BlackRock Gold and General Fund too.