Friday, February 26, 2010

Gold Technicals

This chart shows the price of gold for the past 10 years, where the green line is the smoothed 200 day moving average and the blue line is the smoothed 60 day moving average. (Click on chart to enlarge.)

This chart exaggerates the percentage moves as the price increased, as it is not a log or semi-log scale. Thus, a 10% move from $1000 to $1100 takes up more vertical space than the same move from $300 to $330, though the return on investment is the same.

Beginning with the advent of the gold bull market in 2001, there have been 4 prior episodes where the 60 day sma turned down; those were in 2003, 2004, 2006 and 2008. This has happened again recently. In each of those previous cases, the price of gold churned for some months before resolving to the upside.

Given that the average price of gold in 2009 was well under $1000/ounce, and price inflation in USD is not high regardless of whether official statistics understate the rise in the cost of living, it is a reasonable assumption to look for gold to form a multi-month base.

Of course, gold has been roughly tracking the S&P 500 (SPY) for some time, and that relationship is worth monitoring to look for a trend change in that relationship. This is not a day-to-day relationship, however, so longer periods of time are more important.

Is gold "too popular"? One sees the ads on Bubblevision (CNBC) and elsewhere.

I learned yesterday that a finance column in More, a ladies' magazine, recently recommended that its readers own physical gold for investment/security.

My reaction is that it takes bulls to make a bull market. Bull markets require early investors to sell to later investors and for those investors to sell to yet newer investors. I suspect that few More readers actually own investment gold (as opposed to gold jewelry the value of which is largely as decoration rather than gold content). We are nowhere near cocktail party chatter amongst the upper middle classes discussing how much gold has been stashed in a secure home safe, safe deposit box or storage facility out of the country and how much better that investment has been doing than cash or the stock market.

A reasonable scenario is thus for gold to digest its gains, build a base, and then break out after frustrating bulls and bears alike. Will that potential breakout be to the upside? Time will tell of course, but gigantic projected Federal deficits would seem to make gold ownership prudent at least as a hedge.

Past is not necessarily prologue, though. Gold could surge 10% next week and not look back on, for example, some unexpected financial crisis in an unsuspected place or due to a major successful terrorist attack in the U. S. or U. K. So, if one is attracted to the arguments for ownership of gold in physical or ETF form, trying to time the purchase of a core holding in gold may be riskier than getting in a bit early.

Copyright (C) Long Lake LLC 2010

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