Long Term Gold Technicals/Fundamentals

Well Gold closed at $1292 an ounce today and as it approaches the $1300 mark, I have been noticing an increase in the amount of attention that gold has been getting on CNBC. It’s interesting to see the way this has been playing out and I will try to give an update on where I think we stand right now in the gold market.

Gold has been shunned for a long time now but analysts and managers are beginning to accept the trend for what it is. There are some who still think that gold is an uncertainty, forex, or diversification play, which is completely misguided but the majority of investors on Wall St. are opening their eyes to the fact that the money supply is not in the same class as CPI, PPI, housing sales, retail sales, and GDP. The austrian theory is slowly gaining on the keynesian thought process, even though the word “austrian” hasn’t been used to describe the sentiment, I still get the feeling that it is in fact becoming the case.

So what I’m seeing now is that gold and silver are about to get a boost in the near future from the amount of Wall Streeters who finally realise the Fed’s game is to flood the system with money and that even though CPI is not effected, our money is still losing it’s value.

Although I’ve been critical of the rally, I think that the runup this past month or so was verified by yesterday’s FOMC meeting. I think it’s safe to buy at these levels and even if we have a pullback, buying on the slide is still an option, especially if you keep the upside in mind you’ll know that it’s better to buy now rather than later when it’s too late. This rally looks so good that I want to go ahead and tell you that $1200- $1240 gold is history but there is a possibility that we could go as low as maybe $1210 one more time.

The chart above shows how each time gold pulls back, it doesn’t sustain a breakthrough of the 20 day simple moving average and when it does it climbs back to new highs almost every time. Yes, I did just previously say that it’s ok to buy right now and it is, but you can also try to time the market on these dips by using the 2 year chart with the 20 day SMA in the bollinger bands as a guide. This is why I picked the $1210 range as a possible low on the next dip. The May and June corrections were both about 5-6% and $1210 is roughly the area we would be in if gold corrected starting immediately.

One more thing that separates this rally from the ones in the past year that were followed by severe corrections is the amount of time it took to hit the highs in those run-ups before the pullback. Two of the largest moves in the past year were last November and last May. In November we moved 18% to the upside in about 2 months before correcting down to almost half of the gains. Last May we jumped 10% in just two or three weeks before correcting to the $1180 mark. In contrast to the present, the move we’ve had since August has been about 12% in about a month and a half, which clearly shows the difference in sustainability.

I understand that we’re trained to question a security when the technical indicators show such a strong run but the fundamentals seem to back to technicals. The Fed continues to print money and also continues to blindly point to CPI as an indicator that inflation is low while making statements that they want inflation to be high. Apparently a $400 dollar move in gold isn’t enough inflation for the Fed. A favorite argument the gold bears like to make is the amount of “cable tv ad’s” that are being run on the networks. They conveniently leave out how the amount of “cash for gold” ad’s easily trumps the amount of ad’s from gold bullion dealers. (Honestly you can’t go 5 miles in this city without passing 5-10 “cash for gold” signs or “gold buyer” pawn shops.) Despite what some have implicated, Americans hardly own any gold and the gold that they do own is gold jewelry, not bullion- and they’re selling it like crazy in order to pay off their maxed out credit cards and irresponsible loans. The original gold bulls bought before gold was anything. Now the second stage of bullish buying is starting to come in and it is made up of the rest of Wall st. investors. Soon enough Main st. will jump on, they are the third stage but we aren’t there yet. When they do, that’s when we’ll really see the short covering and the market panic rise to dramatic levels. Also, another thing to consider that goes beyond the point I just made is that the Federal Reserve has control over the dollar. Unlike mortgage-backed securities they can print as much money as they want and until they stop, it won’t matter which types of people are buying gold because the price will still be pressured upward by currency devaluation.

John Roque was on CNBC’s Mad Money with Jim Cramer just about an hour ago and he presented this chart on gold prices relative to the S&P 500. He said that $3000 gold is not at all out of the question and the chart above supports his claim. You can see that we are right on with the S&P and actually below the all time average. Surprising to think that gold is actually below any type of average at the moment isn’t it?

Gold and commodities will be the best investment of the next decade despite what certain analysts might say, analysts who failed to see the 2008 crash and bought bank stocks and mortgage bonds in 2007. So much for being able to recognize a bubble. My point is you have to open your mind to new ideas and reach beyond the training you may have had that leads us all to the same economic though process. You have to start doing your own research and stop listening to the people who got it continually got it wrong in the past. 2008 should have been a wake up call for all of us, the ones who fail to rethink their strategy and adapt to changes will be wiped out by the next financial or economic crisis.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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