Is Gold a Good Investment?
|Is Gold a Good Investment?
The Trader's U E-Letter: Issue # 153
Thursday, September 22, 2005
Is Gold a Good Investment? A Favorable Long-term Forecast
by D.R. Barton, Jr., Chairman, Trader's U
Three weeks ago, I gave an overview of why oil prices were due for pullback. I used a combination of technical and sentiment analysis to reach that conclusion.
Fortunately, the markets agreed with my analysis and oil prices made a 10%-plus pullback from the highs made in early September.
Today, let's look at another commodity that is at a potential turning point after making new highs: gold. The question on traders' and investors' minds is this: "Is gold a good investment?… And has it topped out, or will it keep going?"
Unlike oil in the early part of this month, gold seems to have more technical support for a continued move. Let's see why.
All That Glitters Is, Well, Gold
Gold has made new multiyear highs over the past few days and will most likely see a very short-term pullback. But for the intermediate and longer term, gold is looking bullish as an investment.
First, let's look at the same tool that I used to evaluate crude oil earlier this month. That tool was price momentum, and we used the popular MACD indicator. (For more on using this momentum indicator, see "Tips & Tricks" below.)
In this chart, there are two arrows marked as "1." These show that momentum is matching or confirming the upward price movement. The area of the chart marked as "2" shows that the Average True Range (ATR) has increased as gold has broken to new highs. Longtime readers will recall that ATR is a measure of the average daily range (taking into account overnight gaps) of the instrument being charted. It is also my favorite measure of volatility.
So the momentum and volatility seem to confirm the price breakout of gold. What else have we got?
Gold Price Moving Up in All Currencies, Not Just the Dollar
You may recall that gold had a nice bull market through most of 2003 and 2004. Many analysts rightfully pointed out that most of the gain in gold was a reflection of weakening dollar.
This chart clearly shows that gold could not break above the 350-euro mark during the gold bull run in 2003 to 2004. But this summer, gold broke out against the euro and is showing strength against this currency as well as against the dollar.
Another Telling Piece of the Puzzle: Gold is Still Cheap vs. Other Assets
While gold's price breaks to multiyear highs, it would be informative to know how it is priced relative to some other asset classes. So let's look at gold versus equities (S&P 500) and commodities in general (CRB Index).
Here we see that while gold has been increasing in value over the last 30 months, the S&P 500 has really grown faster. So gold is certainly not overvalued versus the S&P 500.
The CRB index tracks the price movement of a basket of 19 commodities and is used broadly as a proxy for overall commodity price movement.
The chart here shows, once again, that while gold has moved up in price over the last few years, overall commodity prices have increased even faster. So versus the broader commodity market, gold remains a good value.
My crude oil price discussion on August 31 was a short-term analysis and has largely run its course. In contrast, this description of gold's current technical picture and general valuation is for the intermediate and long-term picture. Gold still looks like a good investment place to be for the longer time frames.
Today's Traders U Tips & Tricks
The Chart of the Week
Last night, on Jim Cramer's Mad Money show, he suggested that Energy Partners (EPL) would be a good takeover target. Looks like lots of TV viewers agreed with Mr. Cramer's suggestion, as the stock gapped up and is trading almost 10% higher today. Let's see if this is a "buy-the-rumor, sell-the-news" aberration, or if some other energy company agrees with Mr. Cramer's assessment and makes an offer. If the rumor goes unsupported, we'd expect the price to drop down below its old resistance levels. Thanks to my brother, Douglas, for pointing this one out to me.