Has Gold ended its decade-long bull run?

The sharp plunge of gold prices has heightened fears among investors that the precious metal’s decade-long bull run has ended. Spot gold prices tumbled more than $100 an ounce in a few hours on Monday, and since last Friday its dropped 15% to a two year low of 1322 from the height of 1567, the sharpest two days tumble since 1983. 

People had been caught unaware by just how quickly the market has moved given that the fundamental investment case is unchanged. We have been careful when establishing gold-hedge positions even since gold moved below the $1,600 mark and the Fed started changing its tone on the US stimulus policy. Looking back, MTA players would agree now that our decision to cut loss of $120 on our long position in February was a good bet.

We have been watching all the market moves over the last three trading days. Clearly, everyone was trying to get out of gold regardless of the fundamental arguments. Selling that opened up on Friday and Monday has pushed gold down through two critical support levels of 1520 and 1470. The selling triggered panic stop losses and program selling.

When you have been watching markets and price movements for as long as I have and understand how markets think and operate, you will agree the latest rout on gold demonstrated the importance of technical analysis in determining price behaviors.

Although the extent of the sell-off has been so swift, so severe, and unprecedented in terms of my own experience based on the percentage decline, there were warnings all around that the gold price was going down for weeks.

Since 2009, gold has been part of our portfolio to hedge on the possible US dollar weakness driven by the US quantitative easing (QE) policies. We thought it would be prudent to replace the buy and hold hedging style with algorithmic trading approach early this year. It was clearly another right tactical move based on what is happening to gold and other metals these few trading days.

Does it mean the bull market for gold is gone for good? Long-term gold investors see the metal as a long-term store of real value in a debt-driven financial system. The long-term view is that all the QEs and competitive currency debasement that we are seeing will eventually push gold higher. Some believe every market on the planet is now subject to manipulation and that the latest gold’s plunge is a result of market manipulation. Others were surprised that gold had become less sensitive to bad economic news and market shocks so far this year.

The yellow metal did not react to bullish news which could have driven it up such as the Korea tension or weaker than expect US economic data that would have changed the Fed views on its policy. The Fed has signaled the end of QE in its last two monthly minutes of Fed rate-setting meetings.

In our next update in these troubled times, we would like to bring you back to the start of Fed’s QE program in late 2008 and explain what has been happening since then in terms of market action which will lead us to the near term outlook for gold and other markets. Stay tuned! 

Bottom fishing on Commodity-related themes

After the recent days of price volatility, many investment experts and investors have suddenly turned to be very bearish towards commodity markets.  Besides, HK and Chinaequity markets have severely underperformed the US equity markets since early February. Despite the pessimism, we are quite positive towards some commodities and relevant listed companies.  The reason is very straight forward ------ Be greedy when people around you have become too bearish.

Global equity markets in general closed lower as some investors have started to take profit from the US equity markets.  The DJIA lost 0.56% to 14,537.1 while the UK-based FTSE 100 index slightly fell 0.01% to 6,243.7.  German DAX lost 0.39% to 7,473.7.

We prefer Petro China (857) to CNOOC (883)

Relatively speaking, we are more positive towards gold compared to industrial commodities such as crude oil after the recent commodity market crunch.  The reasons are very simple. Global economy may have chance to face slowdown risk in the year of 2013, thus limiting the demand growth for industry commodities.  However, inflation risk caused by excessive money supply (note: QEs in some developed countries and loose monetary policy in Chinahave created the problem of excessive liquidity) should buy gold price from 2-3 year perspective.  Besides, risks such as currency war and geopolitical risk in North Asia (note: caused by the North Korea missile incident) may imply higher demand for safe haven assets such as gold.  Gold price is around US$1,391 per ounce while NY crude oil is about US$87.2 per barrel.

In theory, upstream oil energy stocks such as CNOOC (883; HK$13.4) should benefit from potential oil price technical rebound.  Nevertheless, company risk associated with the Nexen acquisition may negatively affect the profit level in 2013 and 2014.  As such, we prefer PetroChina (857; HK$9.31), another state-owned oil energy company that has balanced exposure to upstream and downstream operations.

At HK$9.31, Petro China trades at FY12 P/E of 11.9x (EPS: HK$0.785), and valuation appears to be affordable after few months of share price correction.  The share price was HK$11.06 on January 31, 2013, and current share price has cumulatively corrected for around 16%.  Petro China may suit prudent investors who pursue less-risky stock choices.

Quality gold mining stocks with good speculative value

The speculation game of gold is very straight forward.  If gold price is not as bad as most people think of (note: many people have suddenly turned to be bearish recently), the safe haven asset is likely to rebound considerably in the coming quarters.

To leverage the potential speculation return, quality gold mining stocks may be sensible pick.  At HK$8.12, Zhaojin Mining trades at FY12 P/E of 9.9x (EPS: HK$0.820) and the stock should be extremely oversold after months of share price weakness.  Of course, such speculation game may not suit everybody and exposure of the share should not exceed 5% of total portfolio size.

Marc Faber Investment Picks for 2012

Marc Faber : I still like my January investment picks. As a group, Singapore REITS look OK. Among them I like Mapletree Commercial Trust [MCT.Singapore], Frasers Centrepoint Trust [FCT.Singapore], K-REIT Asia [KREIT.Singapore], Mapletree Logistics Trust [MLT.Singapore], Ascott Residence Trust [ART.Singapore], Cache Logistics Trust [CACHE.Singapore] and Parkway Life [PREIT.Singapore]. 

I am also warming to gold shares. Gold corrected to $1,522 last December from $1,921 in September. It rebounded to $1,795 in February and is back down around $1,600. The correction could last longer, but given that governments will print more money, gold is relatively effective as a currency. My preference is physical gold, but I would also own some gold shares, which have been decimated. Goldcorp [GG] is attractive because most of its properties are in the U.S., Canada, and Mexico. The company isn't exposed to regimes that are talking about nationalizing resources. In general, stock markets are oversold. The U.S. government-bond market is overbought. The U.S. dollar is overbought, and gold is oversold near term. - in Barron's roundtable June 2012

Gold Investment : Paulson Sells More of Gold ETF; Soros, PIMCO Buy In

Hedge fund manager John Paulson continued to scale back his position in the world’s largest gold exchange traded fund in the fourth quarter, while George Soros and PIMCO were among the notable buyers of gold ETFs, regulatory filings show.
Paulson cut his gold ETF holdings by about $600 million in the final quarter of 2011, Reuters reports. The hedge fund manager correctly bet against subprime mortgages, but large positions in financial stocks have burned Paulson recently.
In the third quarter, Paulson & Co. cut its holdings in gold ETFs by 36%. [Paulson Scales Back Gold ETF Position]

Selling gold ETFs was likely driven by client redemption needs as Paulson remained bullish on the precious metal, according to the report.
Separately, Soros and investment manager PIMCO boosted their stakes in SPDR Gold Shares (NYSEArca: GLD), which holds nearly $71 billion in assets. Gold futures were trading over $1,730 an ounce Wednesday morning. [Hedge Funds Tap ETFs for Stock, Gold Trades]
Paulson’s sales of GLD “have been more than offset by purchases by other investors,” according to Reuters. The ETF’s holdings climbed nearly 2% in the fourth quarter.
Many hedge funds use ETFs for low-cost, liquid exposure to gold. [Gold ETFs and Hedge Funds]
The gold ETF is up 10% year to date.