Gold’s recent return above the $650 level is a key development in the metal’s bull market. Just how high could gold go this year – and what’s the small cloud hovering on the horizon?
We consider that gold bullion’s recent return to above $650/oz is key. The base that has been forming since the low of $544/oz set in June last year has now completed which should lead to a test of the 2006 high at $730/oz. As flagged several issues ago, this return to levels above $650/oz is a trigger for us to modestly increase exposure to gold linked investments, accordingly in most portfolios we have increased exposure to either BlackRock MLG&G or Investec Global Gold Fund by about 5% of portfolio values.
We have no doubt that of all the flights to quality that might take place probably this year, the one to gold is likely to be the most breathtaking. This bull market is real and the outlook is excellent. The great thing about consolidation periods such as these is that the majority of investors have strong hands – that protects the downside.
Bull markets climb walls of worry, the latest worry for the gold bullion price is that the IMF have been advised to sell some gold to help plug their budget gap. According to the Wall Street Journal, the IMF faces a gaping hole in its budget and has been advised by a blue-ribbon panel to sell $6.6 billion of its gold stock, approximately 400 metric tonnes. The panel was made up of luminaries including the former US Federal Reserve Chairman, Alan Greenspan. For the gold to be sold, over 85% of the board have to agree, as does the US Congress.
In an earlier issue we said that if the BlackRock ML New Energy Fund continued to advance, which it has, we would increase holdings by 5% of portfolio values. A decision has been made to do this and, at the time of writing, purchases are underway. The partial recovery of the oil price to almost $60 per barrel encouraged this decision. We have no doubt that alternative energy investments such as this will, over the long term, prosper mightily.
Copper, which had already suffered a considerable sell-off, appeared to be stabilising. We were watching price action with interest; that was until Friday 2nd February when it lurched down again. The reason given were the serious losses suffered by the Red Kite hedge fund. When very highly leveraged investment businesses suffer losses, the underlying assets they have to sell are likely to fall precipitously in value – a warning shot of what could be awaiting many other asset classes this year if and when fear turns up as an uninvited guest to a party that has got well out of hand.