Should I sell my gold ?

Feb 04 2012

Perhaps you have some unwanted jewelry that you don't wear anymore in a box in the closet.At today's price of $1,723 an ounce gold has risen 10% since the start of the year. Should you sell your gold now or wait?

• Real interest rates are an important factor in determining the price of gold. Inflation is currently 2.91% and short-term interest rates are 0.77%, so real interest rates are -2.14% which is positive for gold. This interesting blog presents a model for predicting the price of gold pricing based on real interest rates. The model has very accurately predicted gold prices since 1989. Using the formula presented here the gold price should continue rising .
• Seasonality has some effect on the gold price. September has traditionally been the strongest month for gold bullion with a rise of 2.6% above the August price. Gold has risen 65% of the time since 1970. November through February are also typically strong months. The reason for this is that this is the time of year that gold jewelers typically do their biggest business. The kickoff is the Muslim holy month of Ramadan, which ends with generous gift-giving in early September. After Ramadan comes India’s post-monsoon wedding season, and in November there’s Diwali, one of India’s most important festivals. During the fall, jewelry makers in the U.S. and Europe stock up in advance of the Christmas shopping season. And in China, there are two big gold opportunities: the week-long National Day celebration starting October 1, and the Chinese New Year in early 2011. Akshaya Tritiya is a Hindu and Jain holy day in that occurs in late April - early May and many people buy jewelry on this day. The Chinese do not have a wedding season as such but they choose auspicious dates based on the Chinese calendar especially if they occur on a Saturday or Sunday.
• The trend is your friend. One popular method used by traders for predicting future trends is the moving average. If the price is above the moving average then this indicates an upward trend.The gold price is currently above both the 200 day moving average of 1,689 and the 50 day moving average of 1,633. This indicates a strong uptrend so the gold price may rise further.

When to sell your gold

You should probably think about selling some of your gold when any of the following become true:

• When the Dow/Gold ratio returns to a value of around 5.5. The Dow is currently 12,837 so the ratio is now 7. For the ratio to return to 5.5 gold would have to rise to $2,334/ounce (at the current level of the Dow).
• When the gold-oil ratio reaches 20 barrels/ounce. With oil at $98/barrel the ratio is currently 18. The gold oil ratio has exceeded 20 in the past but rarely remains at this level for long.
• Sell when the price falls 10% below the 25 day moving average. Applied to the prices since 1979 this seems to give the optimum stop loss.The 25 day moving average is currently 1,680.
• Gold seems to reach cyclical peaks every 22 months. The last peak was in August/September of this year so it is possible that it will reach another peak in June 2013.
• Gold performs best when the yield curve is under 1%. It performs worst when the yield curve is between 1-2%.

How low could gold fall?

Latest News

By historical standards gold is expensive relative to

wages

gasoline

silver

wheat

the stock market

and housing

the supply of gold is steady but

demand is falling

...with one important exception:

the gold ETFs,

which are being bought by speculators and hedge fund managers as an alternative to paper assets. If the US government manages to get its financial house in order, the gold price could fall dramatically.

The “Real” Reason for Gold’s Rise

The main driver for gold prices is real interest rates. Real interest rates are calculated by taking the nominal rate of interest (what is actually paid) and subtracting inflation.

When real interest rates are below zero, cash and short-term investments lose money. In this environment it’s nearly impossible to find decent yields. That’s why savings accounts, CDs, and bonds are paying next to nothing. As a result, savers and investors are forced to turn to other assets which offer returns above inflation. Historically, when real interest rates are negative, they turn to gold and gold goes up. When real interest rates are positive, gold goes down.

The key thing is how long real interest rates can stay negative. In the 70s gold boom, gold’s ultimate high was determined not by how low real interest rates fell, but how long they stayed there. And the big gold correction in the mid-70s came when real interest rates were trending back towards positive territory.

Trading the gold price

We have back tested numerous trading strategies and have never come across one that outperforms buy and hold. This does not mean that such a strategy does not exist, simply that we have not discovered it. The problem is that the gold price makes sudden moves up and and it is very difficult to predict when these will occur. If you miss out on these up moves you will underperform badly. The best strategy that we have found is to buy when the 140 day moving average crosses above the 200 day moving average and sell when the price falls 10% below the 25 day moving average. This would give a return equivalent to 11% pa from 1979 to the present against a 6.73% annual gold price appreciation. On the short side sell gold when the 190 day moving average crosses the 200 moving average and cover when the price goes above the 170 day moving average. This would give an equivalent to 6.63% pa.

The market is like the ocean consisting of ripples, waves and tides. It is best to forget about the ripples and waves and concentrate of the tides. Our recommendation therefore (for what it is worth) is to buy gold and silver in a form that you can use and enjoy such as jewelry or silverware and only sell it when you need to raise money for something important.

Stocks, Houses or Gold?

How much gold should I own?

According to the Talmud you should keep one-third of your assets each in land, 'business interests', and gold. This idea has a modern equivalent in the Permanent Portfolio theory which prescribes a mix of 25% each of Treasury bills, long bonds, stocks and gold.

Most pension funds invest only in equities and bonds, with small allocations to property and cash. However, in recent years concerns have grown over the risks inherent in these asset classes, leading to increased interest in gold.

Silver

If you are investing a small amount of money it is worth considering silver as an alternative to gold. $1000 will buy you about 20 new uncirculated silver coins. In the event paper dollars become valueless, smaller value coins will be easier to spend. Imagine trying to buy $100 worth of groceries with a gold coin worth over $1,000...

Historically the gold/silver ratio has been about 16:1. It is now over 30:1 which leads many analysts to conclude that silver is undervalued. However the 16:1 ratio was based on Western valuations and many Asians, especially the Chinese, are much more interested in gold than silver so there is reason to think that the price ratio may be redundant.