Gold, Revisited

By Brad Thomason, CPA

 

If 2013 was the year to be a stock investor, it decidedly was not the year to hold gold.  While US stocks climbed better than 25%, gold fell almost as far (about 24%).

But a funny thing happened right at the end of the year.  Gold quite possibly put in a bottom.  The price spiked down yet another step, but unlike before buyers said “enough,” and there was a nice little snap back.  In the six weeks since the price has climbed from the low, reversing course at a fairly regular interval, but notching higher lows on the downswings, and inching a bit higher on the ups.

The chart is now poised to go higher.  Or to state that more specifically, the chart is in a classic condition that often exists right before a big move to the upside.  If the price can break and close above about 1280 an ounce, we should see the next up-leg.  And if the following retrace doesn’t go lower, we will probably be looking at a run that will last for awhile.

How long?  Well, you already know I don’t know that.  But if we look at the way the chart fell last year it is probably safe to say that some of that was driven by the last of the hot air going out, followed by what was a legitimate overshoot into undervalued territory.  So even if we are not seeing the beginnings of a new run to a higher intrinsic value, the recovery of the overshoot could very well see prices go up another 10% from here over the next few months, maybe a lot more.

Recall that the previous high (which also was the all-time high) back in the fall of 2012 was $1900 and change.  If prices return to that level, that would be a 50% gain from where they are today.  Even if that took 3 or 4 years, that would still be a pretty healthy move.

Gold is one of those things that you would put in the class of assets which are simply not going to go to zero.  As long as civilization remains a go in some form or fashion, it is extremely likely that people will continue to place some value on gold, just as they have for thousands of years.  Owning gold may result in a loss.  But it is really hard to see how it results in being wiped out.  Beyond that, I will not try to discern the various fundamentals.  It will either go higher or it won’t, and looking at the chart from time to time is a lot more efficient than trying to digest and interpret news which may or may not have an impact on the price.  No matter what though, gold certainly deserves to be recognized as being on the opposite end of the spectrum from some of the more ephemeral offerings available to investors

I mention gold today because we have what appears to be a fairly garden-variety case of one asset class losing some of its steam while another is starting to get underway after its own recent collapse.  These are the kinds of set ups that make people a lot of money when they are acted upon.  If you are a strategic rebalancer and you have exposure to both classes already, you will automatically participate (you should have participated already) in the trimming of the one and the adding of the other.  If not, you have a decision to make.

It is true that classic set-ups do not always result in the outcome we want.  That’s what makes it investing.  But it is equally true that you don’t get to some final destinations without seeing the early steps first come to fruition.  If you saw this set up 100 times and acted by putting some capital behind the already-fallen, perhaps in lieu of putting it behind the potentially-about-to-fall, you would be happy with that decision more often than you would regret it.

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