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Is this the right time to own Gold?

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On August 10, Ray Dalio, chairman and chief investment officer at Bridgewater Associates wrote in a LinkedIn blog post that investors should own 5-10% of their assets in gold. There have been many such calls in the past seven years by different experts, which haven’t been profitable. Therefore, let’s evaluate the conditions and decide whether it’s the right time to invest in gold?

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Golden points

  1. Gold has is a time-tested asset class
  2. Gold is a safe haven, though experts have differing opinions
  3. Any crisis emanating from China, Japan or Europe can see a risk-off trade being taken
  4. Geopolitical tensions are another catalyst for gold
  5. The downside is limited and clearly defined
  6. Buy in a staggered manner as it is difficult to nail the bottom

What is gold’s status as an asset class?

Gold, as a precious metal and as a medium of currency has a very long history. The first known gold coins were used somewhere in 6th century BC, while gold mining is believed to have started at least 7000 years old.

Even in the last century, the world’s major nations were following a gold standard. Many opine that it was the best system and there have been intermittent calls to return to the gold standard to avoid credit bubbles stoked by the central bank’s ultra-loose monetary policies. This shows that gold, as a form of currency or as an asset has withstood the test of time.

Why is gold perceived as a safe haven?

A safe haven investment is one, which retains and sometimes increases in value during tumultuous market conditions when the perceived risky assets lose value. However, the researchers differ in their opinion about gold’s performance as a safe haven investment.

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In a study by Baur and Lucey (2010), the authors noted that gold works as a safe haven only for a short time, about 15 trading days and is only effective as a hedge against stocks and not bonds. In another study, Baur and McDermott (2009), found that gold performed both as a safe haven and a hedge against the US and European equity markets but not for the remaining developed nations and the emerging economies.

On the contrary, researchers in Ireland concluded in their paper “Reassessing the Role of Precious Metals as Safe Havens – What Colour Is Your Haven and Why?” that gold acts as a safe haven in turbulent times in many countries. This was because of the low correlation of gold with the other markets, as shown in the table below.

Gold MSCI World MSCI Asia ex Japan S&P 500 Japan JPM Global Bond
Gold 1 0.13 0.24 0.07 -0.09 0.55
MSCI World 0.13 1 0.84 0.97 0.71 0.29
MSCI Asia ex Japan 0.24 0.84 1 0.76 0.65 0.43
S&P 500 0.07 0.97 0.76 1 0.63 0.18
Japan -0.09 0.71 0.65 0.63 1 0.11
JPM Global Bond 0.55 0.29 0.43 0.18 0.11 1

Monthly data from May 2011 to May 2016

Source: Bloomberg and Stansberry research

Gold acts as a safe haven investment during times of political and financial market stress, however, its effectiveness reduces once the markets move towards normalization.

What is the current situation that benefits gold?

We have a political gridlock in the US. It is unlikely that the current administration will be able to push through critical tax reforms or be able to boost fiscal spending to a level that will accelerate growth. If the Fed tightens and takes steps to shrink its massive balance sheet without adequate growth, the stock market is likely to fall.

The central banks kept interest rates low for an extended period and printed astronomical sums of money to drag the economy out of the financial crisis. Many experts believe that the central banks have used up all their bullets, therefore the next crisis will be severe and will last longer. If such a situation happens, gold might be the only place to hide.

Japan and China are sitting on piles of debt. Any major crisis in either nation will be catastrophic and may lead to a risk-off trade, where gold will be a beneficiary.

Also, the heightened geopolitical tensions between the US and North Korea, the trade conflicts with China, the uncertain relationship with Russia, and terrorist attacks can quickly turn ugly, boosting a move towards safe haven investments.

Ned Naylor-Leyland, manager of the Old Mutual Gold & Silver Fund notes that gold completed a golden cross in December of last year. A golden cross is when the 50-week moving average moves above the 200-week moving average. Every time the golden cross has occurred in the past 30-years, it has led to a bullish move in gold that lasted at least for three years, according to Naylor-Leyland. In fact, the last time this occurred in 2002, after which gold embarked on a massive bull run.

What is the downside risk in gold if we are proven wrong?

As seen above, gold can protect your wealth in case of a black swan event. Therefore, keeping a certain portfolio in gold is a good strategy.

The risk is that the investment made in gold will not return a dividend or pay any interest. It will remain as a dead investment until you sell it. The US markets can extend their bull run for a few more years. Under such a circumstance the investment done in gold will be a wasted opportunity. If the risk on trade continues, gold will fall out of favor and may fall.

After understanding the fundamentals, let’s see what do the charts forecast.

What do the charts forecast for gold?

Long-term trend

Gold remains in a long-term uptrend. It completed a 50% Fibonacci retracement of the large upmove from $255.1 to $1923.7 and is currently stuck in a range between $1045 on the lower end and $1400 on the upper end.

Gold was similarly stuck in a range after topping out in 1980. Subsequently, gold remained in a trading range for about 21 years, before starting its next uptrend in 2001.

The present consolidation is already in its sixth year. If history repeats itself, gold may remain in a trading range for a long time before starting a new uptrend.

However, the downside seems limited. Therefore, traders can buy gold on dips and sell it on rallies near overhead resistances. All long positions should be protected with a stop loss of $1030.

If, however, the world faces any new financial crisis, gold can resume its uptrend and rally to new lifetime highs. However, it is difficult to pin point when this is going to happen. As many traders don’t want to hold their positions for the long-term, let’s analyze the daily charts for short-term buy setups.

Short-term trend

On the daily charts, $1300 is a strong resistance, as gold has returned twice from those levels. On the downside, $1200 is a strong support because gold has bounced twice from these levels. Therefore, a breakout of $1300 will most likely carry gold to the upper end of the larger range to about $1400 levels. On the other hand, a breakdown below $1200 will push gold down to $1120 levels.

However, as gold has been in a range and it has a history of long consolidations after a stupendous rise, long-term traders can invest in a staggered fashion.

First 25% of the proposed allocation can be done at the current levels. If, however, gold fails to breakout, the next 25% allocation can be done at the lower end of the range at $1200. We expect this level to hold.

The final 50% allocation can be done when gold resumes its uptrend. All stops should be kept at $1040 levels.

Our risk is defined, but if the world faces another financial crisis, gold is likely to rally to a new lifetime high.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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2 Comments

2 Comments

  1. Dji127

    August 27, 2017 at 1:50 pm

    Awesome write up on Gold, thank you. Why did gold trade in the tight range between 1980 and 2001? Manipulation or?

    • Rakesh Upadhyay

      August 27, 2017 at 5:56 pm

      Hello Dji127,

      Thank you. No, the range was not because of manipulation.

      Gold is seen as a safe haven and a risk-off trade. The US equity markets saw some of their strongest gains between that period buoyed with a strong economy. Therefore, gold was out of favor and remained range bound.

      Thank you.

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Analysis

Crypto Update: Chinese Crackdown Triggers Next Leg of Correction

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The cryptocurrency segment is crashing again, with double-digit losses across the board, and with several coins shedding around 30% in one day amid the widespread and heavy selling. The sell-off was triggered by reports on a new set of measures by the Chinese authorities limiting crypto trading, which added to the still looming South Korea related regulation worries. Bitcoin tested the mini-crash lows at $11,300 today in early trading, dipping slightly below that level before a strong bounce started.

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The most valuable coin is now between two crucial support/resistance lines, with the other ahead at $13,000, and as the downtrend is entering its more mature phase the $10,000 and $9,200 levels could come in play, with a possible dip to the support zone near $7,650.

BTC/USD, Daily Chart Analysis

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Interestingly, the coin is still hovering within the daily range of the crash of December 22nd, and that points to a very active and volatile period ahead near the low at $11,300, as automatic orders will likely get triggered on both sides of the market.

The short-term setup is bearish, and although it’s possible that the primary support level will hold, odds still favor another leg lower, following the exponential run-up at the end of last year that pushed sentiment into bullish extremes.

BTC/USD, 4-Hour Chart Analysis

Altcoins

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Music: One Overlooked Use Case

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So far in this year, Ethereum has been the crypto star appreciating over 80% to a recent record of $1402. All this suggests that more and more applications are being created. We know this by the demand for Ether, the gas that drives the Ethereum network.

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The reason behind the explosion of Ether demand was confirmed by Ethereum co founder Steven Nerayoff in a CNBC interview where he claimed the number of Ethereum projects today is more than 10 times year ago levels.

One of those areas is the music business and there are several names appearing on the ICO list to add to your research agenda.

Why The Music Business Needs Help

Music may live forever but the business side has been in trouble for a long while. Over the last decade there have been only three years when the global value of music sales increased. The combination of digital music and outright pirating through peer-to-peer sharing has much to do with the long-term trend.

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Throughout the world there are 69 copyright and royalty societies given the responsibility of documenting, collecting and distributing music royalties. That means collecting a few pennies whenever a song is played on the radio, Internet or anywhere else. Four of the largest of these is in the US, followed by Japan, Germany and Britain. Their operations are truly byzantine.

Experts in the music-publishing field confirm the time between music usage and royalty payment can run close to 24 months. Even then not all royalties are distributed. According to my sources, there are often millions of dollars collected by royalty authorities everywhere that never make it to the entitled recipients. That sort of practice borders on criminal behavior but copyright and royalty societies operate in a sub-rosa manner making it difficult to understand their policies.

In the past just 4 major record labels controlled over 80% of the industry. These giants could afford a full time legal department to pursue royalty issues dominated the music industry. Today, however, independent labels represent almost one-third of the market. This means less democracy in the business with the young independent artist at a particular disadvantage.

Of course, musicians aren’t the only group of artists loosing out on their pay. There are writers, poets and painters that go largely unprotected.

The music business is just easier to track because it has more data. Yet in spite of all the information, the music industry is widely recognized for its lack of transparency. Blockchain technology has the ability to disrupt long-standing industry practices.

ICOs To The Rescue

The number of Ethereum based white knights is starting to appear on the horizon promising to rattle the industry and hopefully restore some democracy on behalf of the independent artist.

One simple business model comes from a startup SingularDTV who is attempting to build their ecosystem on top of Ethereum. Here is the basic value added proposal.

SingularDTV tokenizes the artist work. In doing so the artist is turning their music into a financial asset. Anyone who buys into an artist’s token owns a share of the creation and its income stream. The more people consume an artist creation, the higher goes the token price.

Only time will show if SingularDTV succeeds with this model. The consequence of this model is how it eliminates many of the middlemen and nefarious influences in the industry. Instead of singing on a street corner for bread, an artist could raise money upfront without relying on an advance from a record label.

According to SingularDTV, distributing content via blockchain would allow artists to skirt streaming platforms like Spotify to earn royalties on their own terms. Now that is true democracy.

SingularDTV may stand out a bit in the news due its recent ICO success in raising $8 million but they aren’t the only player in the music game. Names like Voise recently raised $1 million as well as Soundchain, Blokur and Opus to name a few.

I am no longer a registered investment advisor, which means I don’t go around making investment recommendations. So I will only suggest this group to put on your list of late night reading. Next time, I will take a closer look at more of these names.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Technical Analysis: Cryptocurrencies Start Week on a Quiet Note as NEO Shines

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The broad Bitcoin-led correction continued to dominate trading in the crypto-segment throughout the weekend, as the most valuable coin drifted sideways above the key technical level at $13,000, with dwindling trading volumes.

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BTC remains in a declining short-term pattern, although the digital currency still holds well above the mini-crash lows from December, spending almost a month now in the daily range of the year-end plunge. We still expect the largest coin to complete the current cycle with a move below the crash lows and the $10,000 level after the stellar rally of the previous months. Key support is still found near $13,000, with further levels at $11,300, $10,000, $9000, and stronger levels at $8200 and $7700

BTC/USD, 4-Hour Chart Analysis

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Altcoins also settled down across the boards with only a few coins registering strong activity. Ethereum and NEO have been among the coins making headlines, as the second largest coin continued to grind, higher still trading near its recent all-time high today. The price of the ETH token is moving in a short-term uptrend, in the face of the stretched momentum indicators, but we expect a meaningful correction soon, and long-term investors should wait for a more favorable technical setup before entering new positions, with key support levels at $1000, $850, $740, $625, and near $575.

ETH/USD, 4-Hour Chart Analysis

Ripple remained under heavy selling pressure in the meanwhile, as the oversold bounce of the weekend faded away and the coin got close last week’s lows again. As the short-term downtrend is intact, traders should stay away from entering new positions, while investors should wait for short-term sell-offs towards the main support levels at $1.50, $1.25, and $0.85 to add to their holdings.

XRP/USDT, 4-Hour Chart Analysis

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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