The bull with golden horns

Gold prices may persist in sideway ranging between US$840 and US$740 for another 3-6 months

TILL now, gold is probably the one and only precious metal that is most popular and used as a safekeeping instrument by governments and the man-in-the-street.

Since prehistoric days, gold has been used to transact for other commodities (goods) besides some lower valued precious metals like silver and copper. All this while, accumulation of gold is a sign of portraying wealth. As we proceed into modern civilisation, merchants classified it as storage of higher exchange-value commodity in general monetary system which we call “money”.

After the Second World War, the United States, Great Britain and France initiated the Breton Woods Accord that pegged all major currencies to the US dollar since this is the least affected economy from the war shambles. In return, the greenback was pegged to the Gold Standard price at US$35 per ounce. This double peg policy lasted until 1971 before it was abolished when most of the European countries had successfully recovered their prosperity from the devastation of war!

In today’s economy, gold bullions are always staked as part of the total reserves in a government’s vault. Basically, gold is the best instrumental hedge against inflation and the stored valued will never be decommissioned.

According to some expert studies, the total amount of gold that has been unearthed is probably less than 200,000 tons. Nevertheless, it is still unknown how much more gold is lying underground and waiting to be discovered by humankind.

Currently, the central governments that house the largest portion of gold reserves are mainly from the developed countries like Germany, Switzerland, Italy, France, Canada as well as the International Monetary Fund. On the other hand, the gold producing countries include the United States, Canada, South Africa, Australia, China, Russia and Indonesia.

As gold market has been largely consumed in the gradual globalisation, and as a classical hedge against economical uncertainties like terrorism in major economies, fatal virus outbreaks and rising scarcity of energies, the prices have been escalating steadily correlatively to its inelastic supply over the new millennium!

Traditionally speaking, gold is quoted and traded in troy ounces as adopted by the US Mint for the regulation of coinage since 1828. Below are some illustrated weighing standard for Gold products:

1 troy ounce =31.104g
12 troy ounces =373.25g
32.150 troy ounces =1kg

Since September 2001, the gold began its surge in reaction to the sabotage of the World Trade Centre in New York and looked back again.

The first major retracement was seen in May 2006 after it skyrocketed to US$730.20. The correction completed at US$541.90 in the following month and traded sideway for a few more months, before it climbed again from October 2006.

In November 2007, gold prices hit another new high at US$845.55 and began to move into a sideway retreat.

From technical outlook, we reckon the market will persist in sideway ranging between the top US$840 to bottom US$740 for another three to six months before a new trend development takes over from there. Nevertheless, if the price were to violate the current resistance US$845.55 anytime within the next six months, it may potentially reach out to US$900-910 as our first target price.

This unexpected surge can be easily identified if there is any major drawdown in whichever developed economy or US$ slides again to another new low against major currencies. Such unfavourable movement in currencies can be measured when US$/JPY falls below 107.00, EUR/US$ hiking across 1.5000 or GBP/US$ inflates above 2.1200!

From the above hypothetical analysis, investors and traders may assume new long positions in gold to profit from a potential new high, only when the resistance lifted the barricade!

Otherwise, we recommend you wait in this coming cooling period to pick from the lower regions. In the long run, we still view the gold demands to be optimistic and advise players to invest cautiously from every drawdown correction!

Below are eight ways investors and traders might like to consider wisely in longing gold investments:

Gold Saving Account - This is equivalent to a saving account but monetary commodity has been replaced by gold of purity 999.9. Investors may check with individual bank if such account facility is available. Upon opening the account, all deposits and withdrawals are done at the discretion of account holder. However, the unit volume of every purchase /sale transaction may be preset by the bank’s regulations. Total amount worth of the account value is dependent of the fluctuation of gold spot price.
Gold Certificates - This investment is based on multiplications of standard gold bullion and transacted at bigger monetary value due to its volume. Each kilo-bar bullion is of purity 999.9 and investors need not take delivery but only purchase stored-value certificates. Issuing banks may impose annual fees at very small amount for storage cost. Amount value of certificates is marked up to gold spot price.

Spot Market - This is also known as Loco-London PM fix price which is set around 9am (Eastern Time) in New York morning. It is the one fixed price to be followed by gold merchants around the world on that particular day and accommodates the largest transactions on any given day. During the US business day, global traders will follow the COMEX Gold prices due to its intraday fluctuation but will switch to Loco-London spot price as guideline once New York market closes.

Exchange Traded Funds (ETF) /Gold backed securities - Gold ETF in Asia was first ever listed in Singapore Exchange (SGX) in 2006. StreetTRACKS Gold ETF functions similar like a stock counter and it traces very closely and in fact, almost on par to the daily spot price.
Each transaction is based on per block of 10 shares and can be purchased through a regular broker.

Gold Futures - COMEX Gold futures is listed in New York Mercantile Exchange (NYMEX). Each trading contract is based on 100 troy ounces and transacted on margin operation. This
instrument is mainly used for hedging and speculation purposes. Expiration of futures contract is settled on physical delivery.

Gold Mining Trusts and Shares - Trust funds are structured investments designed and offered by individual banks. They carry higher risk as the funds-bucket is comprised of gold mining companies usually operating offshore. Trust funds are usually close-end investments that come with annual fees and management fees imposed by funds managers. To invest directly in mining shares, investors may buy outright listed price of whichever gold mining companies that are believed to be favourable!

Gold numismatics and coinage - These are mint-proof, mint-finished and conventional Gold coins usually of purity 999.99, 999.9 or 999 depending on the rarity of design and print.

Investors usually pay higher premium than spot price when purchase such finished products from banks and collectors’ outlets. Gold finished products are more for personal interest and stored-value investments over collector’s value.

Gold jewelleries - These are all personal ornaments such as bangles, bracelets, rings, chains, pendants, watches etc that are made of good gold quality at least of purity from 18 Karat to 999.9.

However, just like numismatics, these are finished products that usually sold at higher premiums than spot price due to additional cost factors such as craftsmanship, designs, collector’s value, logistic etc.

In summary, gold lovers or investors could select the various ways of locking their money into this precious commodity so long as they can be easily liquidated when such need arises.

Some consumers may like to utilise gold as a form of beautifying instrument at the same time investing in its appreciation of monetary value, while others may want to make killing profits from the opportunity of global demands by taking higher risk positions! Whatever the reason could be, it is important for the investors to check on the risk factors before jumping onto the back of this bull.

Below are some essential check points if you have planned to make an investment in gold:
First of all, investors must understand the risk to be involved based on the amount of his investments.

Evaluate your financial capacity before forking out the money. Setting an expectation on maturity term of your investment is a good avenue to confirm your risk appetite.

Set an investment objective vs goal by confirming if this is the best option you intend to adopt. Next, ask yourself what kind of expected return upon your proposed maturity term is reasonable to you.

Regular monitoring of your portfolio is a good habit as you may need to execute an urgent exit when unforeseen circumstances arise.

Personal upgrade is important. Read more extensively and consult experts regularly to improve on your knowledge regarding the facts on your portfolio.

Finally, it is always important to develop the skills of risk management when you are involved in higher risk investments. Cash or physical products usually have limited losses, subject to its full value being held.

Nevertheless, getting involved in margin trading or over-exposure of your financial capacity out of greed could bring irreversible disasters when unfavourable situation arises. Therefore, it is essential to shorten the potential risk factors while striving for an edge over bigger profits. Definitely, this is the first rule-of-thumb for all successful investors!

Dar Wong has 18 years of trading experience in global futures and forex market. He is a professional hedge advisor, trader, coach and also the forex market analyst for The Trader’s Journal. For more information, you may visit his website http://www.pwforex.com or contact his East Malaysia representative Tracy Yu at tracyu3@yahoo.com.