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Thursday, 21 October 2010

ALL THAT GLITTERS IS NOT GOLD

All that glitters is not gold is a well-known saying, meaning that not everything that looks precious is precious.In my opinion Gold by itself qualifies for this adage.

I was speaking with a very dear friend of mine, we discussed if it was wise to buy gold at the current ruling prices particulalry when every analyst seems to be predicting an immediate price target of Rs.30,000 per 10 grams in the next 3 months and goldman sachs predicting $5000/oz equivalent to Rs.250,000/- per 10 grams


Experienced investors know that no trend -- no matter how profitable -- lasts forever.


The same should be true for gold. Gold has risen from below $700/oz. in November 2008 to $1,315/oz. in the beginning of October 2010. That's an +88% gain in under two years.


Futures for the yellow metal are now up by an incredible 20 percent this year, putting it on course for a 10th consecutive year gain, the longest surge the metal has seen for some 90 years.


And while any mention of shorting gold is enough to get a gold bug's blood boiling, one day not far from today the time will come when it's the right trade to make.


Consumer sentiment


I believe that time may have arrived to short Gold for I strongly believe the economy internationally is bound to improve, jobs will be created and a brighter future is heading our way.


 The above very much reflect the effect that confidence has on the economy. If things eventually look up, the average Prashant and likes will no doubt invest in risky assets that offer the chance for higher returns.


Returns generated from a growing economy create optimism that the future will be brighter than it is now.
On the other hand, if I do not have confidence in the economy, they I am more likely to consider owning gold to protect my capital.


Until people have more confidence in the economy, many investors will continue to hold more gold than they've typically held in the past.


Gold prices tend to move opposite of consumer sentiment, So when consumer sentiment trends down, the price of gold trends up. The reverse holds true as well.


In a nutshell, when you fear of a major crisis in the near future and which according to you may drive confidence down, placing some of your capital in gold makes sense. As fear drives gold higher, you can ride along.


But when confidence hits its lowest point world over (it is my view that may be it cannot get worse) which it seems to have done a couple of months ago and then starts turning up, in my view it may be time to start reducing your gold holdings. Any improvement in the consumer sentiment numbers will encourage investors to sell their gold and move into assets such as equities.


Time to short gold?


Above I have focused on how to time and when to short gold.


When an asset like gold has had a large run-up on the deterioration of expectations by consumers and investors, there is bound to be a retreat, especially when investors begin to move their capital to higher risk assets and away from gold.


As consumer sentiment rises and confidence slowly returns to the economy, investors holding gold will soon start selling some or all of their holdings, which will drive down the price.


While it may not be part of the mainstream sentiment about gold in India, My observation is that as an investor one needs to be greedy when other are afraid and vice versa, that's the sort of bet to look for and without any emotions attached sell Gold where by you book your profits.


Risk Factors
Should rampant inflation occur, caused by out of control money printing, and initiate a full blown dollar crash, then indeed the unbelievable predictions that gold prices will soar beyond anything imaginable may indeed be possible.


Prashant


DISCLAIMER


I am NOT an investing professional. I will sometimes jump into something that appears to be good; it may or may not be. Even if it is good for me, it may not be good for you. Anything I write on this site is my opinion and should NOT be relied on or taken as investing advice. Material presented here is for informational purposes only. Before acting on anything you read on this site, you must do your own research and you must come to your own conclusion which you will ultimately be responsible for, including any loss you may incur.



Thank you for reading Eazeetrade. Hopefully, we can all learn something together and become better investors!



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