Notes from the USA (Apr 2011) – a guest post

Nowadays, it seems like every investor has only one tune on her lips – the chorus from Shirley Bassey’s title song from the James Bond movie ‘Goldfinger’: “He loves only gold; only gold; he loves gold”!

When every one and his brother-in-law are excited about investing in gold, it is probably a good time to take some profits, or, at the very least, refrain from buying. KKP sounds just such a note of caution in this month’s guest post. If you enjoy reading this post, and/or disagree with him, please take a few moments to let him know (by using the ‘comments’ link below this post).

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A Gold Rush or Just Gold Mania?

Gold and Silver have been on the top pages of many trade magazines; now it has started to appear on normal (lay people’s) magazines. The above graphic is from Newsweek…..When articles appear in abundance on magazines for the layman, it usually signals a market top or bottom of the underlying asset class. It is the peak of emotion that gives the final ‘uumph’ to the underlying asset class, and marks the top or bottom. Gold and silver are approaching such levels, leading to possible corrections. So, what actually happened?

The Dollar Index slipped to 73.735 on April 21 (and again lower on April 27), the lowest since August 2008, which really is fore-telling that the confidence in the US dollar is fading. So, is the move in gold completely a reflection of the dollar’s under-performance? Yes. Correlation has been uncanny this year - U.S. Dollar Index has fallen 6.3% since the end of last year while gold bullion has risen 6.2%!!!

Silver has more than doubled over the past year as investors rode after silver as a store of value amid speculation that China will buy gold and silver to diversify its foreign-exchange holdings.

As every speculation that mankind has experienced has come to an end, the gold bugs are concerned too. Tulip mania, Y2K reprogramming, Internet revolution, Housing boom from 2000-2006 (see graph below), FII moving billions to Emerging Markets (see graph below of crash in 2008), US being crushed under debt, US$ on a big decline etc. The concern of gold bugs is not just theoretical either. Many expect the dollar to stage a comeback after the U.S. Federal Reserve brings its monetary stimulus program — its second round of quantitative easing (QE2) — to an end this coming June 30 ’11. As interest rates are also supposed to bump up at some point in time to combat the inflation created by oil/depreciated-dollar, we will start seeing some strength in the US$. Indeed, some are anticipating that the rally could begin as soon as June-July, depending on the outcome of the Fed’s meeting. Will it last?

Technically, the meteoric rise of gold and silver is a concern, which foretells a correction of some magnitude. Volatility is growing and the exponential rise is happening now. Compounding it with the economic event of QE2 ending, might be simply a convergence of events that might create a buying opportunity for gold bugs or the people who feel left out…..This might look like a bearish view from me, but it really is a cautionary view. This means that buying more at these prices is not warranted unless you are a short term trader. What do you think?

Disclaimer: I am still holding gold/silver bullion, numismatic coins, Gold ETF and gold/silver/diamond jewellery as one of the asset classes in my portfolio.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.