The Price of Gold Continues To Rise!
A few months ago in my article “Has the bug bitten you yet?” I wrote the following:
“This is truly one of those buy and hold instances. A perfect storm is brewing in the gold world, and there is only one way for this precious metal to move – and that is UP. There are several great ways to play this market . . . .”
At that time gold was trading near $700. Recently it moved above $800. That’s a 14% move in only a few months. I’m going to say now what I said then, gold is going higher. In the last few months, a few very specific items have hammered this idea home, and I’m going to share them with you.
Look at the gold chart shown below. The commodity created a perfect consolidation move after peaking above $700 in the second quarter of 2006. It used the 50 day moving average as support numerous times to create a solid base. Then it had a strong breakout above $700 with its only initial resistance at around $800. Now gold is actively trading above the $800 level, effectively removing a key psychological barrier. It would not surprise me if on a technical basis, gold consolidated once again around the $800 level, before making its next move.
While the technical indicators look strong, the Federal Reserve Board has added another level of safety and confidence to gold investments. Their recent rate cuts have destroyed confidence in the US dollar and cut its value. This bodes well for hard assets and commodities like gold. In an environment with a deteriorating dollar, hard assets hold their value, and objects like gold become all the more desirable. This flight to quality starts at the dollar and ends at the “other” world’s currency, gold.
Procter & Gamble (PG) one of the largest consumer products companies in the world recently warned that their margins would be under pressure. The reason? Rising commodity prices. They decided to pass that price increase along to the consumer in the form of higher prices. This, in my mind, is the second most obvious sign of inflation, the other one being the ever higher gasoline prices at the pump. In an inflationary environment gold is a natural hedge. As inflation becomes more widespread, knowledgeable investors will flock to gold driving up prices.
The rising middle class throughout the world is also a major influence on gold prices. Countries like India and China, who have an ever growing middle class, see gold as a status of wealth, and rightfully so. As the value of gold increases, it will only increase its status. The gold that is removed from the market, in the form of jewelry, limits supply of the commodity and drives up prices.
So, between the technical supports in the market, the influence of a declining dollar due to Fed action, the prospect of inflation first foretold by P&G, and the unchecked demand by the emerging markets middle class – gold can only go up. I would look to make selective investments on pullbacks, and always use proper position sizing and trailing stops.
My favorite way to play the gold market is through gold ETFs. These ETFs simply purchase the commodity in the open market, and hold it for investors, giving owners of the ETF direct exposure to gold. StreetTRACKS Gold Shares (GLD) is one of several.
Category: Currency Trading
