an insight into gold

8/7/2019 An Insight Into Gold

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CONTENTS

Introduction

Gold Price Forecast of 2011

U.S Dollar Weakness

Central Bank Reserves

Investors’ Interest

Who Is Buying Gold

15 Fundamental Reasons to own Gold

Technical View




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Introduction

Gold is a ubiquitous metal. Its uses vary from a milk man’s wedding to the crown of the

queen. The preference for gold ranges from ornamental value to increasing investment

options. The prices of Gold are witnessing an unprecedented rise in the recent past. In

2009 the price of gold registered an increase of around 15 percent. In the last three

years there has been a 70 percent increase in the price of the yellow metal. Forecasting

or predicting the price of gold is not an easy task. There is not a simple formula or chart

to consult when guessing where bullion prices will be in 2011. The entire economy is

similar to a living breathing organism with many complex parts. Isolating any one aspect

is done with the risk of being inaccurate. The price of gold is a difficult number to

determine in the overall economic outlook. To even begin the less than scientific

process of forecasting the price of gold, an investor would need to comprehend what is

fundamentally behind gold prices. What drives the price of gold up or down? What are

the reasons for this rise? This question is perplexing everyone from an economist to a

common man across the world.

Gold Price Forecast of 2011

There are some business applications for gold such as contacts and wires in semi-

conductors, or the use of gold in medical instruments. But has the rising price of gold

from 400 to 1,400 dollars per ounce in 5 years really come from the industrial or even

the jewelry market? There is another factor to consider.

The value of paper currency can be quite volatile. The FOREX market will take a

currency pair for trading and chart the relationship. Look at how the US dollar and the

Yen changed relative values over time. In 2002, one US dollar was worth 135 Yen, and

in 2010 this amount fell to a mere 85 Yen. Why is the price of paper currency so

unstable?




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• Political unrest

• Economic depression

• Rising Inflation

There are many other micro-factors that affect gold prices, but essentially it is seen as a

form of currency with backing. Gold trading is an alternative monetary system when the

local government is in distress. Gold can be easily traded anywhere in the world so its

value is not tied directly into the country of one’s origin. Gold is the warm blanket that

many pull around them when fear of the outside world looms. With the economic and

political problems around the world it is easy to understand why many would desire aform of currency that has intrinsic value.

Gold Price Forecast for 2011 High from US Dollar Weakness

Traditionally, gold has been used as a hedge against the falling dollar. The idea behind

this trading is that gold is an alternative to currency that is not as strongly influenced by

any one economy. The relationship between gold and currency is an inverse one. In

addition to this, as gold is often quoted per ounce in US dollars, investors with

alternative currencies may find that their native dollar stretches further with more value

when the US dollar falls.

Central Bank Gold Reserves Buying Affect Predictive Price Models Per Ounce

Central banks typically hold gold as a portion of their reserves. If central banks engage

in net buying of gold this can drive spot prices up; if they sell, the price per ounce maysubside. Jeffrey Nichols, a leading precious metals economist for over 25 years, states

that China may be looking to add 5,000 tons of gold to their central bank reserves over

the next three to five years. If this is true, gold may have a supply downfall with this




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potentially increased demand in 2011 as well as the following years -- thus extending

the bullish trend.

Investor Interest Increasing in Futures and Commodities

Another factor boosting the value of gold is the rising interest in commodities from

individual investors and investment funds alike. The recent decade has provide market

speculators an increasingly easy way to trade gold, silver, oil, coffee, and other

commodities through chart trading platforms in their own home. As the spot price of gold

continues to rise, this creates a self-generating buzz of excitement which in turn leads to

higher prices yet again.

Who is Buying Gold and Driving Prices Up?

In recent years there has been a large surge of interest amongst the commodity market

traders, but many others are buying gold too:-

1. Ordinary people can open up their trading platform and buy and sell future contracts

of gold.

2. The government can accumulate gold in its reserves. While paper currency is good

for funding local projects, gold is a better form of payment when dealing with other

countries.

3. Banks may add gold to their reserves as well.

4. Stock traders can buy and sell gold based ETF’s or exchange traded funds.

All of these sources create a buying and selling pressure that will ultimately drive up the

price of gold or crash it down.




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15 Fundamental Reasons to Own Gold

Global Currency Debasement

The U.S. dollar is fundamentally and technically very weak and should fall dramatically

over the next few years. However, other countries are very reluctant to see their

currencies appreciate and are resisting the fall of the U.S. dollar.

Thus, we are in the early stages of a massive global currency debasement which willsee tangibles, and most particularly gold, rise significantly in price.

Rising Investment Demand

When the crowd recognizes what is unfolding, they will seek an alternative to paper

currencies and financial assets and this will create an enormous investment demand for

gold. Own both the physical metal and select mining shares.

Alarming Financial Deterioration in the U.S.

In the space of two years, the federal government budget surplus has been transformed

into a yawning deficit, which will persist as far as the eye can see. At the same time, the

current account deficit has reached levels, which has portended currency collapse in

virtually every other instance in history.




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Negative Real Interest Rates in Reserve Currency (U.S. Dollar)

To combat the deteriorating financial conditions in the U.S., interest rates have been

dropped to rock bottom levels, real interest rates are now negative and, according to

statements from the Fed spokesmen, are expected to remain so for some time. There

has been a very strong historical relationship between negative real interest rates and

stronger gold prices.

Dramatic Increases in Money Supply in the US and Other Nations

Authorities are terrified about the prospects for deflation given the unprecedented debt

burden at all levels of society in the U.S. Fed Governor Ben Bernanke is on record as

saying the Fed has a printing press and will use it to combat deflation if necessary.

Other nations are following in the U.S.'s footsteps and global money supply is

accelerating. This is very gold friendly.

Existence of a Huge and Growing Gap between Mine Supply and Traditional Demand

Mined gold is roughly 2,500 tons per year and traditional demand (jewelry, industrial

users, etc.) has exceeded this by a considerable margin for a number of years. Some of

this gap has been filled by recycled scrap but central bank gold has been the primary

source of above-ground supply.

Mine Supply is anticipated to Decline in the next Three to Four Years

Even if traditional demand continues to erode due to ongoing worldwide economic

weakness, the supply/demand imbalance is expected to persist due to a decline in mine

supply. Mine supply will contract in the next several years, irrespective of gold prices,




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due to a dearth of exploration in the post Bre-X era, a shift away from high grading

which was necessary for survival in the sub-economic gold price environment of the

past five years and the natural exhaustion of existing mines.

Large Short Positions

To fill the gap between mine supply and demand, Central Bank gold has been mobilized

primarily through the leasing mechanism, which facilitated producer hedging and

financial speculation. Strong evidence suggests that between 10,000 and 16,000 tons

(30-50% of all Central Bank gold) is currently in the market. This is owed to the Central

Banks by the bullion banks, which are the counter party in the transactions.

Low Interest Rates Discourage Hedging

Rates are low and falling. With low rates, there isn't sufficient contango to create higher

prices in the out years. Thus there is little incentive to hedge and gold producers are not

only hedging, they are reducing their existing hedge positions, thus removing gold from

the market.

Rising Gold Prices and Low Interest Rates Discourage Financial Speculation on the

Short Side

When gold prices were continuously falling and financial speculators could access

Central Bank gold at a minimal leasing rate (0.5 - 1% per year), sell it and reinvest the

proceeds in a high yielding bond or Treasury bill, the trade was viewed as a lay-up.

Everyone did it and now there are numerous stale short positions. However, these

trades now make no sense with a rising gold price and declining interest rates.




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The Central Banks are nearing an Inflection Point when they will be Reluctant to

provide more Gold to the Market.

The Central Banks have supplied too much already via the leasing mechanism. In

addition, Far Eastern Central Banks who are accumulating enormous quantities of U.S.

Dollars are rumored to be buyers of gold to diversify away from the U.S. Dollar.

Gold is increasing in Popularity

Gold is seen in a much more positive light in countries beginning to come to the

forefront on the world scene. Prominent developing countries such as China, India and

Russia have been accumulating gold. In fact, China with its 1.3 billion people recently

established a National Gold Exchange and relaxed control over the asset. Demand in

China is expected to rise sharply and could reach 500 tons in the next few years.

Gold as Money is Gaining Credence

Islamic nations are investigating a currency backed by gold (the Gold Dinar), the new

President of Argentina proposed, during his campaign, a gold backed peso as an

antidote for the financial catastrophe which his country has experienced and Russia is

talking about a fully convertible currency with gold backing.

Rising Geopolitical Tensions

The deteriorating conditions in the Middle East, the U.S. occupation of Iraq, the nuclear

ambitions of North Korea and the growing conflict between the U.S. and China due to

China's refusal to allow its currency to appreciate against the U.S. dollar headline the




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geopolitical issues, which could explode at anytime. A fearful public has a tendency to

gravitate towards gold.

Limited Size of the Total Gold Market Provides Tremendous Leverage

All the physical gold in existence is worth somewhat more than $1 trillion U.S. Dollars

while the value of all the publicly traded gold companies in the world is less than $100

billion US dollars. When the fundamentals ultimately encourage a strong flow of capital

towards gold and gold equities, the trillions upon trillions worth of paper money could

propel both to unfathomably high levels.

There is no definitive answer to where the price of gold will be in 2011. The best an

investor can do is to look at possibilities based on historical data. If an investor assumes

that paper currency will continue its debasing trend, what would be a high estimate on

gold prices per ounce? To answer that one needs to look for the highest that gold has

been in the past.

January 21st, 1980 saw the price of gold reach 850 US dollars per ounce. To

understand how much money this is worth today one would need to adjust the figures

according to the Consumer Price Index. 850 dollars in 1980 is worth 2,250 US dollars in

the year 2010. If gold were to repeat the value of a previous high it could double from

the price it is trading at in June of 2010.

Other analysts suggest that because the current economic output is many times greater

than 30 years ago, the peak price of gold could even reach 5,000 dollars per ounce.

On the other hand the argument could be made that markets are based on mass

psychology and trader emotions. Some might suggest that the average person would

not believe that the price of gold could ever reach up to 5,000 dollars, thus creating a




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resistance to that level ever being achieved. Some analysts believe that as the market

recovers in 2011 and beyond, the price of gold will retreat dramatically as the economic

woe gets pushed to the backs of people’s minds and their hedging tactics are tossed

aside.

In next section, we have illustrated our technical view on Gold by presenting its various

averages, Fibonacci retracement levels, Expansion levels and indepth analysis using

various technical indicators on different time frames of charts supporting our technical

view, and on the basis of these our technical target on Gold.

TECHNICAL VIEW

Gold CMP - $1458.10 Target Price - $1600

Moving averages

Moving Averages 20 Day 50 Day 100 Day 200 Day

Daily $1440.28 $1421.77 $1395.02 $1363.07

Weekly $1399.67 $1318.82 $1185.95 $1012.99

Fibonacci retracement levels

SCRIPT 0.0% 23.6% 38.2% 50.0% 61.8% 100.0% 161.8% 261.8%Gold $680.9 $762.7 $813.5 $855.7 $895.9 $1031.2 $1246.9 $1597.8



Expansion levels

SCRIPT 38.2% 50%

Gold $1247.8 $1315.3

Weekly Pivot

SCRIPT R4 R3

Gold $1601.4 $1554.1 $1

We will study the expected m

The weekly chart below show

In this pattern waves 1, 3, 5 a

while waves 2 & 4 are correct

61.8% 76.4% 100% 138.2%

$1379.6 $1456.8 $1588.7 $1794.4

R2 R1 P S1 S2

506.8 $1489.8 $1459.4 $1442.5 $1412.1

vements for Gold from Elliot Wave Theory

s the first 5- wave pattern which is called i

re motive, meaning they go along with the

ive waves.


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150% 161.8%

$1861.9 $1926.3

S3 S4

$1364.8 $1317.5

point of view.

pulse waves.

verall trend,




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We have numbered the waves starting from the wave 1 low of $681 and concluded that

wave 5 is extending. This opinion is based on the size of the corrections since the wave

4 low at $1044. The following analysis of the minor waves and their relative proportions

should make this quite clear:-

Wave 1 680.9 to 1006.1 +325.0 +47.75%

Wave 2 1006.1 to 864.4 -141.7 -14.08%

Wave 3 864.4 to 1226.2 +361.8 +41.85%

Wave 4 1226.2 to 1044.0 -182.2 -14.9%

Wave 5 is extending…

The similarity of the 14% declines of the corrective wave 2 & 4 above indicates that they

are part of the same impulse wave. The much smaller declines of 8.6% and 8.7% are

evidence that wave 5 is still extending.

Extended wave 5:-

Wave 5.i 1044.0 to 1265.0 +221.0 +21.2%

Wave 5.ii 1265.0 to 1156.6 -108.5 -8.6%

Wave 5.iii 1156.6 to 1431.3 +274.7 +23.8%

Wave 5.iv 1431.3 to 1307.5 -123.8 -8.7%

Wave 5.v 1307.5 to 1601.5 +294 +22.47% (forecast – assumes the

same % gain as in average of 5.i & 5.iii)

Total 5 1044.0 to 1601.5 +584 +53.4%



If we assume that 5.v is an a

22.47%, the target for 5.v w

wave 5 equals the overall gai

is equal to $545. This provide

This concludes the end of int

peak of wave 5, (the peak bei

magnitude of 14% to 16%.

Also supporting the $1600 fo

is the trend line we have dra

May 2006 and the upward ch

verage of the 5.i and 5.iii gains of 21.2%

ould be $1601. One further possibility is t

in waves 1 through 3, i.e. from $680.9 to

s a target of $1044 + $545 = $1589.

rmediate wave 5 of Major Three. The decli

ng somewhere between $1585 and $1610)

ecast will come close to achievement duri

n below on the monthly chart of gold fro

nnel which has the resistance at $1612.


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nd 23.8%, say

hat the gain in

1226.24 which

ne to follow the

, should be of a

g the up-move

the troughs of



In the weekly chart of Gold

from March 2008 to October

during October 2009. It took

the gold took resistance and

breached 161.8% retraceme

uptrend taking support at th

previously mentioned target

suggests an upward breakou

$1430 level.

below, is its Fibonacci retracement of do

2008. If we see, the gold breached the 10

old a year to fully recover from the downt

consolidated at the retracement level if 16

nt level in the late 2010. Since then the

$1300 level. The next retracement of 2

of $1590 - $1610. The ascending triangle

t in gold but before that it may pullback to


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ntrend starting

% retracement

end. After that

1.8%. The gold

gold is in the

1.8% is at our

formation also

take support at



Below is the weekly chart of

2008 and if analyze the trend

line in the recent months. So

may show some profit book

expansion level of 61.8%.

$1226 where it formed a s

Currently the gold has breac

gold is headed towards the e

our fibonacci retracement of

old. We have drawn trend line from the tr

line we find that Gold has taken solid supp

if we go by the trend line then we can as

ing at $1390 which almost coincide with

e have seen an expansion of Gold price

lid support at $1044 and headed for it

ed the expansion level of 76.4% at $1455.

pansion level of 100% at $1590 which aga

61.8% and our target range of $1590 - $1


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ughs of March

ort on the trend

sume that gold

the Fibonacci

s from $681 to

next uptrend.

. From here the

in coincide with

10.



To support our calculations o

trend of gold which is in gen

applied Ichimoku Kinko Hyo (

and determines future areas

the Senkou span (Orange), th

line serves as the second su

of future price movement. Th

could continue to climb highe

red line is moving up which

Chikou Span or the green line

buy signal.

n Gold we have applied some indicators t

ral reasonably bullish. In the weekly chart

IKH). It is an indicator that gauges future p

of support and resistance. In the chart, th

e top line serves as the first support level

pport level. Meanwhile, the Kijun Sen acts

e Gold price is higher than the blue line; s

r. The Tenkan Sen is an indicator of the m

pretty indicates that the market is in uptr

is crossing the price in the bottom-up dire


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show you the

below we have

rice momentum

price is above

hile the bottom

as an indicator

o this means it

rket trend. The

nd. Lastly, the

tion, so that's a



We have also applied the Pa

gold below which simply focu

you can see that the dots

downtrend to below the candl

The 14 day RSI is also abov

bullish.

rabolic SAR (Stop & Reversal) on the wee

ses on catching the beginning of new tren

shift from being above the candles du

es when the trend reverses into an uptrend.

the zone of 50 which signifies that the p


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kly chart of the

s. In the Chart

ring the minor

.

ecious metal is




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