THE GOLDEN KEY
by George Kleinman
Editor, Commodities Trends
May 26, 2007
Let’s begin with some golden facts. Gold is so rare that the entire global supply could be compressed into just one 18-yard cube. To put it another way, more steel is made in one hour than all the gold mined over the history of mankind.
Man discovered gold in approximately 5000 BC. Gold jewelry was first manufactured around 3000 BC by the Sumerians in what is now southern Iraq. King Tut died in 1352 BC. Gold was found in his teeth and gold chains in his tomb. The Minoans of Crete produced the first known gold cable chains (still popular today).
The chemical symbol for gold is Au, from the Latin aurum, which means “shining dawn.” Aurora was the Roman goddess of dawn. (The warming color of the sun has been described as golden.)
Know what the difference is between 24-carat and 18-carat gold? The word carat was derived from the carob seed, used by ancient merchants in the Middle East as a unit of measure. Twenty-four carat is pure; 18 is 75 percent gold with an alloy making up the balance. Fourteen carat is only 58 percent gold.
Pure gold is yellow, white gold is an alloy of gold mixed with silver, and rose gold is an alloy using copper.
Gold is nontoxic, never corrodes or tarnishes and is virtually indestructible. Both women and men love it and its lustrous beauty for jewelry.
I admire gold for its beauty and value, and I also like trading it. My COMEX membership (where gold is traded) turned out to be one of the best investments I ever made. But is gold a good long-term investment? Is it a good trade right now? Consider the following.
Gold reached its all-time high price of $875 per ounce in January 1980. That price has never been exceeded in the past 27 years, despite inflation and the fact that many commodities reached new record highs during the past few years. The recent high price was $728, just about a year ago.
Actually the last dramatic commodity bull market took place between 1970-80, with not just gold but a variety of commodities benefiting. Back then it had to do with the booming Japanese economy. This time it’s China.
China is so big, however, that this commodity boom should last longer and go farther than the previous one. The Chinese, the Indians and millions of other people around the world love gold jewelry. Millions of them, for the first time, now have the discretionary funds to buy it.
And then there’s the investment factor--gold as money. The Chinese have a cash surplus of more than $1 trillion cash in US dollars alone, apart from their billions in surplus yen and euros. They’ve expressed a desire to diversify out of paper into hard assets, with gold near the top of their list.
To the first question--is gold a good longer-term investment?--my answer is yes. Over time, I see the path of least resistance as “higher,” perhaps much higher. How high is high?
Take a look at the copper market for guidance. For more than 100 years, every time the copper price approached the mid-$1.50 range (considered a “high” price), copper prices retreated. Then, in May 2005, copper prices exceeded this level, hitting $1.70 for the first time ever, and then rapidly proceeded to double again on the road to $4. The reason? Chinese demand.
When gold is finally able to breach the $728 mark, and then the all-time high of $875, who’s to say a double to $1,750 isn’t possible? Again, this is somewhere out there in the long term, and the way to play it may or may not be gold mining stocks, an area I have no expertise in.
Recently a hot gold mining stock, Bre-X, went way, way up and then all the way back down to zero. And there are literally hundreds of other gold stocks that have suffered the same fate.
Rather than worry about management, financial statements, environmental concerns and even possible fraud, why not just focus on the metal itself? Bullion, coins or, if you want to use leverage, gold futures or options fit the bill. Futures, however, can be risky. It’s all about timing, which brings us to the second question: Is gold a good trade right now?
I try to first determine and then follow the trend of a market; in the short run, the gold trend appears to be down. A few weeks ago I wrote about a volume spike that took place in the gold futures market. Volume spikes can be associated with tops or bottoms. You have to watch the trend post-spike to determine which. Those two days of abnormally high volume took place on May 10 and May 11, with June gold trading between $666 and $683.
Since that time, gold has broken down below this area. If there’s a reason, I would attribute it to a somewhat stronger dollar. Dollar strength equates to gold weakness most of the time. However, the most-dynamic gold markets take place when gold action diverges from dollar action. For example, in 2005 the euro started the year at 1.36 to the dollar and ended the year at 1.18, but gold started 2005 at $420 and ended it at $520. So don’t believe those who tell you gold always moves opposite the dollar; it doesn’t.
To buy gold (as a trader), I’d first like to see the market able to trade above the area it was trading at during those two high-volume days. And here’s something else to watch for; let’s call it my key to the next great gold buying opportunity:
For a variety of reasons, I wouldn’t be totally surprised to see the dollar correct and strengthen in the coming months. However, when gold starts to move higher again (or even just ceases to move lower) in the face of a strong dollar…well that’s the key, the time to buy gold as a trade.
© 2007 George Kleinman http://www.financialsense.com/editorials/kleinman/2007/0526.html