Connect with us

Analysis

Is this the right time to own Gold?

Published

on

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?

// -- Discuss and ask questions in our community on Workplace.

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.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

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 money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

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.

You must be logged in to post a comment Login

Leave a Reply

Analysis

Bitcoin’s Record-Breaking Rally Continues as Prices Cross $8,100

Published

on

Bitcoin surged to new highs on Sunday, as the world’s largest crypto by market cap continued to generate bids following the cancellation of Segwit2x.

// -- Discuss and ask questions in our community on Workplace.

BTC/USD Price Levels

The value of a single bitcoin reached a daily high of $8,110.59, its best level on record. At press time, BTC/USD was valued at around $8,002 for a gain of 4%.

With the gain, bitcoin’s market cap now exceeds $133 billion. That’s roughly $100 billion greater than Ethereum, the market’s second most valuable cryptocurrency.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Bitcoin has added more than $1,100 over the past five sessions. It was down around $5,600 just one week ago.

Bitcoin Cash (BCH), a digital currency alternative that broke away from the original blockchain Aug. 1, was down 5.1% at $1,185. BTC and BCH locked horns earlier this month after the Segwit2x hard fork was abandoned.

$10,000 and Beyond?

Institutional clearing platform LedgerX has initiated its first long-term bitcoin futures option, which is set to expire Dec. 28, 2018. In setting up the option, LedgerX is assuming a price of $10,000 at the time of expiration. That’s a 25% premium on current levels.

Investors who buy the option are essentially saying they believe prices will exceed $10,000 by the time of expiration.

Bitcoin is being helped by growing institutional demand for the digital currency, as hedge funds, day traders and other mainstream investment outfits look to access this burgeoning asset class. CBOE and CME Group have each announced plans to integrate bitcoin into more conventional investment vehicles in the coming months.

The rush of institutional money into bitcoin is a sure sign that the digital asset class is becoming too big to ignore. The value of all cryptocurrencies in circulation has already exceeded $230 billion, with more than a dozen coins valued at $1 billion or more. Nine others have a market cap of $500 million or greater.

Coinbase Responds

The rise of institutional capital has also compelled Coinbase to introduce a custodial service targeted at account holders with more than $10 million in assets. This service targets hedge funds and other institutions that have remained largely on the sidelines of the crypto revolution.

In a recent blog post, Coinbase CEO Brian Armstrong announced that the new service will launch sometime next year.

“When we speak with these institutions, they tell us that the number one thing preventing them from getting started is the existence of a digital asset custodian that they can trust to store client funds securely,” Armstrong wrote.

In addition to maintaining the minimum $10 million asset requirement, institutions must pay a $100,000 setup fee to gain access tot he Custodial program. In response, institutional investors will receive assurance that their assets are secure.

The Coinbase Custody website lists broad support for bitcoin, Ethereum (ETH) and Litecoin (LTC), as well as ERC20 tokens. The ERC20 protocol has emerged as the favorite for startups launching initial coin offerings (ICOs), a controversial crowdfunding model that has already overtaken early stage venture capital.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

Continue Reading

Cryptocurrencies

Is Ethereum Ready to Play Catch Up With Bitcoin?

Published

on

In mid-June of this year, the difference between the market capitalization of bitcoin and Ethereum had narrowed down to less than $8 billion. This had many market participants excited. They expected Ethereum to dethrone bitcoin as the leader, a move popularly termed as flippening.

// -- Discuss and ask questions in our community on Workplace.

Key observations

  1. Ethereum has hugely underperformed bitcoin
  2. The chart pattern suggests that Ethereum is likely to play catch up in the next few months
  3. Stay on the long side of Ethereum to benefit from the bullish setup

However, fast forward five months and the difference in the market capitalization of the top two cryptocurrencies has increased to about $96 billion. This shows that while bitcoin has raced ahead in the past few months, Ethereum has hugely lagged behind.

However, is the underperformance about to end?

The chart pattern shows that Ethereum is likely to embark on a rally of its own that can carry it to $645 to $670 levels in the next few months. Let’s see how we arrived at these levels.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Ethereum opened trading at $8.16 on January 1, 2017. It started its rally in March and by June 12, it reached a high of $420, an astronomical rally of about 5047%. Thereafter, it entered a period of consolidation, digesting the gains.

On the charts, Ethereum has formed a large symmetrical triangle, which usually acts as a continuation pattern. The breakout is generally in the direction of the long-term trend, or the trend that was prevailing before the pattern formed. In this case, the sharp move from January to June confirms that the cryptocurrency was in an uptrend before forming the triangle.

However, this is not a fool proof trade because sometimes the symmetrical triangle acts as a reversal pattern. Therefore, the best way to play this trade is to wait for a breakout of the triangle before initiating any trade.

Where can we take an entry?

Currently, the resistance line of the triangle is at about $378 levels, a level close to today’s intraday highs. The bears are likely to strongly defend this level. However, if the bulls breakout of $378 and manage to close above the resistance line, the trade on the long side will set up.

Different traders use different methods to confirm whether the breakout is valid or not. Some wait until price moves 3% above the breakout level, others wait for three consecutive closes above the resistance level.

However, we have observed that the best breakouts never look back, hence, waiting for three days may lead to a missed opportunity. Therefore, we can wait for a closing above the resistance line of the triangle and initiate the long positions on the following day.

The breakout can face resistance at $400 and $420. However, we expect the virtual currency to scale both these resistances and rally towards its pattern target zone of $645 to $670.

Notwithstanding, even the most reliable patterns can fail. Therefore, our stop loss will be kept at $340. We don’t want to hang on to the trade if it falls back into the triangle. We shall raise our stops to breakeven as soon as Ethereum breaks out to new lifetime highs. From thereon, we shall trail the stops higher to protect our paper profits.

Note

The chart pattern suggests a resumption of the long-term uptrend in Ethereum. However, this will not get confirmed until the cryptocurrency breaks out and sustains above $380. Therefore, please initiate positions only on a breakout and close above the triangle. Entering presumptive trades may result in losses.

Featured image courtesy of Shutterstock. 

 

 

 

 

 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

Continue Reading

Analysis

Long-Term Cryptocurrency Analysis: Bitcoin Flirts with $8000 as Altcoin Bull Persists

Published

on

Bitcoin’s swift recovery was the main topic of the week, as the most valuable coin not just regained its steep losses, but hit a marginal new high towards the end of the period. The entire segment is experiencing capital inflows as the total value of the coins climbed above $230 billion for the first time ever after finally leaving the vicinity of the $200 billion mark.

// -- Discuss and ask questions in our community on Workplace.

BTC breached the $8000 level before turning slightly lower on Friday, but despite the severely overbought daily chart, it is still trading near its all-time highs. As the long-term picture still suggests a deeper correction, investors should wait with opening new positions and traders should also control position sizes here. Key support levels are found at $7700, $7000, and $6700, while the recent key break-out level at $5000 still hasn’t been re-tested.

BTC/USD, Daily Chart Analysis

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Dash is still the most bullish altcoin from a technical standpoint, despite this week’s short-term correction, as the coin is trading above its prior all-time high, and this weekend, it looks ready to test the break-out high near $500. Support levels are still found at $400, $360, and $330, and as the long-term picture is approaching overbought territory, investors should only hold on to their positions here.

DASH/USD, Daily Chart Analysis

The other major altcoins are also mostly in bullish setups, with some of them already in the latter stages of this cycle, like Monero and IOTA, but elsewhere in the segment, there are still opportunities for both traders and investors. Let’s see the detailed long-term view.

(more…)

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

Continue Reading

Trending