Wednesday, 14 December 2011

A grateful gold victim

This morning I wrote a post saying I needed to work out whether I should buy or sell as gold prices fell.  I couldn't make up my mind and headed off to meet my dad for lunch.

At the time the loss showing on my account was £216 but, by the end of the trading day when I next looked, that loss had grown to £360. The 28 ETFS Physical Gold shares (PHAU) were down 8.58%, or £262. Meanwhile the BlackRock Gold and General fund units were down 6.6% or £99. 

The BlackRock fund is really down quite a bit more than that though as it would have been priced at midday, before shares like Fresnillo took the worst of the damage (Fresnillo shares fell 11% although some of the damage was due to going ex dividend and new rules announced by FTSE - although Google finance shows a big rebound late in the day) 

Gold price news was all about the strength of the dollar hurting commodities across the board with the usual talk about gold's safe haven status being ruined because of its volatility which unnerves potential and existing investors... like me! But Bloomberg reports that gold ETF investors are still hanging on.

Below are a few charts showing the performance of the dollar index against the world's largest gold ETF the SPDR Gold Trust (GLD) using Bloomberg charts.

Over one month it looks like an inverse relationship of note

Over three months that still holds:

Over six months:

Over a year:

And over three years: 

If gold drops from its current £1570 level to $1,500 per ounce that would be a further 4.5% loss while a fall to $1,400 per ounce mean an 11% fall from its current level. For my portfolio that would  mean a loss of another £307 just on the ETF adding to a loss of £668.45 or 21.9% on the original £3,057 investment. 

That's a scenario mentioned by a number of commentators like Dave Lutz and also by Dennis Gartman - although he's said similar things before - and even though this is a bit more positive from Gold Seek, the $1,400 level is not ruled out.

I'm still not sure what to do but may start selling tomorrow. I suppose I should be grateful that this moment of doubt has come sooner rather than later and will force me to get a bit more comfortable with my own views.

Gold keeps falling: buy or sell?

It's difficult to work out a sensible short-term course of action. I have now invested around £4,500 into gold and gold companies. That initial investment is now worth around £4,300.

Of that I have £2,900 invested in ETF Securities physical gold exchange traded fund PHAU (the value of that investment is now down from £3,057) and I have another £1,440 invested in the BlackRock Gold and General fund (down from £1,500).

So far I have not sold anything. I would like to sell something soon, just to get used to the idea.

But I want to sell higher than I have bought and at the current level that is not where things stand. I could either see it as a buying opportunity or a signal to sell before gold falls further.

Two days ago I was thinking the same thing. I bought £1,000 at the lowest price I have managed so far, the question is whether I want to carry on buying as the price drops or sell as the price drops.

Today's fall (link to google chart above) - PHAU is down nearly 2% while PHGP, which is a closer tracker of this investment in sterling terms is down 1.5% - appears to be on the back of renewed confidence in the US economy and diminished likelihood of more quantitative easing. (Although that appears to have been tempered a little.)

This hit gold on two fronts as far as I can tell. One is that more QE means that there is greater suspicion of currencies - money printing undermines the value of currencies and increases demand for gold and bolsters confidence in people who already own it. This hasn't happened.

It also means that investors, who have been expecting QE to boost share prices (because it encourages investors to move cash from less risky assets into riskier ones like shares) will have been disappointed too.

Any damage to equity markets has tended to lead to falls in the price of gold.

So good news in Europe would help gold and bad news in the US would help gold. We're getting the opposite at the moment plus quite a lot of negative talking which has a pretty big effect on people like me.

Experienced gold investors like Dennis Gartman are saying things like this about the direction of the gold price: "Lower, we fear and perhaps decidedly so. So much damage has been done to the psychology of the market in the past week and so many late longs have been caught off guard that we think wholesale liquidation … and perhaps forced liquidation … shall be the outcome."

Apparently this will have sent many investors running for the exits.

Gartman said: "We can imagine gold trading back toward €1075-1125/oz and/or toward US$1475-1525. It really won’t take much to push it there. Panic liquidation would do so rather swiftly. We’ll simply stand aside from the gold market then, preferring to be long of gold and not wishing really to be short of it. The sidelines seem the cozier of the two."

But it's not like he hasn't said similar things before and been wrong - in June 2011 he said gold could fall swiftly to $1,480 an ounce when it was trading at $1,527.

A week later he had reversed his position buying more gold. But that's not a good basis on which to ignore his words.

Some other views of well known gold investors outlined here by Neoclassical Economist on Seeking Alpha - mainly negative (Jim Rogers, John Paulson) - not like the author or other gold 'guru'Jim Cramer.

For now I'm not making a decision about anything. I'm going for lunch with Dad.