After a $325 rise in 2010, gold bullion yesterday suffered its steepest one-day loss since July – down by $34 at the U.S. close after an intra-day low of -$40. The chart below shows the sell-off plunging the gold price down to right on top of its 50-day moving average. Also, the “triple top” could point to more downside in the short term.


Does gold’s decline mark the end of the ten-year bull market? Or was it just a question of heavy profit-taking after performance gaming at the end of December?

BCA Research commented as follows: “The gold bull market has been driven by the potential inflationary implications of current large fiscal deficits and central banks that are prepared to stop at nothing to prevent deflation. It may be several years before developed-world real interest rates return to the norms of earlier decades, especially in the U.S. In this environment, gold will continue to be an excellent insurance policy and should continue to fare well when measured against the major currencies.

“In addition, it is hard to make the case that gold is currently a crowded trade. Many institutional and retail investors agree with the gold bull case but have been slow to act, even as their faith in conventional stocks and bonds has ebbed. Indeed, based on investor meetings and anecdotal evidence, we estimate that the average portfolio allocation to gold is around 1%. This suggests that there is plenty of pent-up demand which could still flow into gold and related shares.

“True, the gold bull market will proceed in instalments, not a straight line. It would not be a surprise to see gold suffer occasional selloffs of perhaps a few hundred dollars at a time during 2011. We would broadly view these selloffs as opportunities to boost core holdings. The bottom line is that gold is a potential mania candidate and expect good returns in this metal in 2011.”

I couldn’t have said it better myself.

Source: BCA Research, January 4, 2011.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.