I have a message for those people who fled to the hills over the last few years fearing that global trade was going to collapse, paper money would be worthless and that gold would be the only thing worth owning for years to come and that message is: “the global economy is recovering, please come back and join the rest of us”.
The Australian stock market is not soaring to new highs that is true, but slowly investors are becoming more optimistic about the future. The S&P/ASX 200 Index has been trying for months to break through 5000 and although it has struggled, it has never looked like testing the lows of March 2009 again.
As I have said plenty of times before, it is most likely that we will not see the S&P/ASX 200 or ASX All Ords drop near 3000 again for a long time, if ever. The worst is now behind us. The global economic bubble went pop, lot’s of money was lost and now we are in the midst of a slow and painful recovery process.
As the chart below clearly shows, the overall trend since March2009 has been upwards, although over the last few months the market has basically moved sideways. This is a good sign, as it means that fear is not gripping the market when there is some bad news and this should provide a base for the next rally, and upwards is where I expect the market to move this year as I said back in September last year.
Australian S&P/ASX 200 Index (XJO) 5 year chart (March 2010)
I am not saying that the global economy is back to normal, whatever normal is, but the great global depression that the doom crowd said would sweep the world did not happen and will not happen this time around. They were wrong, but I suspect many of them are still talking up gold, although they are probably seriously thinking about selling soon.
Will gold prices go up from here? Maybe, I am not expert at picking the tops of bubbles but they are not going to hit $2000 USD an ounce this year based on supply and demand fundamentals. Gold prices are in bubbleland in my opinion, but this is just my view so please don’t take this as form of financial advice or base any trading decisions on my ramblings.
I know some people say that the long term trend for gold prices is upwards, but the same can be said for beer prices. However for gold (not beer) the next major move in my oppinion will be downwards and let me use a few charts to show you why.
Firstly let’s have a look at the ETF (Exchange Traded Fund) GOLD versus the ASX All Ordinaries over 5 years. Once again I am using the ETF GOLD as it reflects gold prices in Australian dollar terms.
ETF GOLD vs ASX All Ordinaries Index 5 year chart (March 2010)
This chart shows very clearly how gold prices took off as the global financial crisis (GFC) started to take hold in early 2008. The big spike in the gold price in late 2009 was as a result of the collapse of Lehman Brothers and this illustrates how gold prices trade at a premium when fear is the prevailing emotion amongst investors.
As you can see gold prices in AUD terms have soared way ahead of the ASX All Ords and I doubt this situation will last for much longer. In other words I reckon gold prices are going to come down, the ASX All Ords Index will rise and that the close correlation between the two will be restored, it’s that simple.
But maybe you are think that a simple correlation between gold prices and the All Ords doesn’t mean much? Well let’s toss in oil and gas prices as well and see how that looks.
ETF GOLD vs XAO vs Oil & Gas Index 5 year chart (March 2010)
The chart above shows how the ASX All Ordinaries (XAO) and the AMEX Oil & Gas Index (XOI) are once again pretty much in sync and fairly closely aligned. But as the chart shows, gold prices are still up at record high prices and gold is still trading at what I would call, GFC levels.
Make no mistake about it, the demand for gold for industrial use or for jewellery is not driving gold prices towards these high levels. The high gold prices are being driven by investment demand.
Many experts say gold prices will keep going onwards and upwards and crack $2000 USD an ounce this year. I am not an expert, but I disagree with that forecast and will quite happily acknowledge that I am a complete gold market dunce if that happens.
As for the overall stock market, I am not expecting 2010 to be a bumper year but rather just a year where we see the global economy slowly recover. Economic growth in China may slow, but a gradual recovery in the U.S, Japan and Europe should counterbalance that and the stage should be set for global economic growth in 2011.
So for those people who might be up in the hills hiding in the fallout shelter I think the time is right for them to come down and smell the roses. Capitalism is not dead, you don’t need to use gold coins to buy food and the world is open for business.