Saturday, October 27, 2007

Is Gold Increasing in Value?

This week, the price of gold was up by just under $20.00 an ounce, and gold stocks, as measured by GDX increased by 3.42%. My gold stocks short position gave back all the profits made last week, but I will continue to hold these positions, as long as they do not exceed their October 15th high.

With gold rising so quickly, you may think that it would be insane to short gold stocks, but then again, is gold really rising? I feel that much of the yellow metal's recent rise can be attributed to a falling dollar and not to rising gold. In other words, an ounce of gold is worth more dollars, but those dollars are, in turn, decreasing in value by a similar rate.

This is evidenced when looking at the value of gold in a currency that is not currently being debased, such as the Canadian Dollar. The chart on the bottom shows that Canadians holding physical precious metals, such as myself, have not made money in the last 2 months.

Although holders of gold have not seen impressive profits when denominated in currencies other than the US Dollar in last couple months, this has not been the norm since the gold bull market began. The trend for gold is up overall in all currencies when looking at the long term picture, as illustrated in the following chart.

As you can see, Gold has done quite well when denominated in several major world currencies over the long run. This is shows that the bull market in gold is healthy and that gold in real terms certainly is rising.

Furthermore, in addition to trading gold stocks, I feel that one should allocate some money in a core position of physical gold or silver, and to hold that position regardless of what the charts tell you. In a bull market, the best strategy is a buy and hold strategy.


HeadlineCharts said...

hi, I'm not sure about being short gold stocks at this time. Looks to me like the entire group is at the start of a pretty strong uptrend that could last a while. Plus this is the time of year when these stocks do well. After a 1-2 week consolidation, a number of them look like they want to break higher again.

Got A Watch said...

Sunday nite, spot gold now at $791.10 US, silver at $14.29.

Seems demand is very strong. Short term price targets of $850/$15.50 or higher are being discussed.

Yet I wonder if the FED is really going to cut this weak. Certainly the situation seems dire in credit markets, but that news is not filtering out much as the MSM does not report it.

Maybe we are at the point where precious metals assume their historical place as a pure flight-to-safety investment.

This week will be interesting! Enjoyed the blog read.