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The Sandilands effect

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by Peter Switzer

Gold shot through the US$1000 an Oz level and this is often associated with flights to quality, when stock market players are getting a bit panicky. However, there are many reasons why gold is glittering and one could be linked to what I call the Kyle Sandilands effect.

Stick with me on this.

Those playing their investments defensively comes at a time when famous or infamous US bears are predicting a big sell off of shares.

The Nobel Prize-winning economist, Joseph Stiglitz and Elliott Wave expert, Robert Prechter has predicted a big collapse of share prices and therefore it makes sense that bears would be looking at gold.

Gold international

Then there are the Chinese, whose economy is booming again and culturally this country is hooked on gold. This would help the share price.

Then I’m told this is the Indian gold season, and our Indian friends have a legendary passion for the glittering stuff, but the high price is a bit of a turn off.

Reuters out of Mumbai reported the following: “India, which accounted for more than 20 per cent of global demand for gold jewellery in 2008, has seen a steady decline in demand since bullion first powered to US$1000 an ounce in February, which also sent local futures to record high at 16,040 rupees (US$329.90) per 10 grams.”

Throw in the technical reaction of gold going through an important level such as US$1000, which can attract momentum players, and this run up is understandable but why it’s happening is still guesswork.

Clearly, the local stock market’s 69-point gain on the day when gold beat this barrier shows that the bears are still badly outnumbered, if market fears are driving the gold price.

Canary in the coal mine

Another, and arguably the more important reason, why the gold price is moving up is because what it’s typically measured in — US dollars —has become as popular as Kyle Sandilands in a Jenny Craig meeting.

Reuters thinks two chief reasons explain the price spike.

“Gold rose above $1000 an ounce for the first time since February as investors sought a safe haven due to the dollar's weakness and worries about the sustainability of the global economic recovery,” it reported.

So just when the IMF says the recovery is better than expected, the market is moving to a negative position. Markets can get it wrong but they can also be the canary in the coalmine and so it feeds our uncertainty.

The irony

Some experts are not sure if it was gold that pushed the US dollar lower or that the dollar pushed gold up, but a UN report saying the greenback might have to be re-examined as the world’s reserve currency has not helped the dollar’s reputation.

Ironically, a lower US dollar will be good for the US economic recovery — how many people are thinking about shopping in New York or a US snow holiday with the Oz dollar soaring?

The quicker the US recovers, the quicker the world economy comes back and so this gold play could be pointing to an okay thing rather than being a pointer to bad times ahead.

Better judgement

And for those looking for reasons to buy shares instead of turning tail and running, it’s worth noting that Macquarie’s equity strategists have pushed up their 12-month forecast for the S&P/ASX 200 to 5,293, which implies a 17 per cent rise could lay ahead. They must be looking at different crystal balls than those who are buying gold because they’re afraid.

Of course, that’s their judgement, but I can bet they put more thought into their big call than Sandilands did when he suggested that Magda Szubanski could lose more weight in a concentration camp!

With investments, big predictions and even so-called media stars, all that glitters is not necessarily gold.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, September 09, 2009