Gold Is Consolidating: Prelude to a Breakout?

Let's take a look at the logic behind the case for a surge upwards in the price of gold:

1. First is the long-term trend in gold, going back to around 1999 -- the monthly chart below illustrates.

The move from $250/oz to over $1000/oz represents the first leg of the move. Can we expect another move upwards of approximately $750/oz? Well, that's what I'm betting on, but only time knows for sure.

2. For gold permabulls like myself, of particular interest is the consolidation that has been happening over the past four months, since mid-April. Is this the type of consolidation that precedes a breakout?

Fundamentally, the driver for gold is instability with monetary policy -- this is something I discussed in my series on Crisis Investing. Or at least that is the way it has been historically, but there are many dislocations going on in the market since October of 2008, so now may be a time when we are breaking away from history. With that said, I'm still betting on several thousands of years of history, which shows that fiat money ends in a poorly managed currency and the return to a commodity-backed currency, typically gold.

For those looking to get into gold, I recommend my article on how to create a diversified gold portfolio.

Disclosure: No positions

Comments

[Zoltan L. K...:]

Gold is still most likely a win-win situation. It advances on instability and also on economic growth (because of rising commodity prices) and as a hedge for both cases.

Aug 12 05:36 AM

[oldmaninPA:]

I hope so...owning gold stocks now is like watching grass grow.

Aug 12 08:18 AM

[learnmoney:]

There are a number of pro's and con's for Gold. I too am a bul and have been for over 3 years. However, I was always taught to take profits from time to time and lower my initial capital purchases to zero (if possible).
So far so good except that it has been difficult to make short term profits from good gold mining shares and that means only the best ones.
However, I agree that we are going to wait for another banking problem or events which causes GOLD to go up substantially.........the way the US government is going about sorting its mess out leads me to think that there is someting round the corner...............let us hope so!

Aug 12 08:57 AM

[Screwloose:]

On Aug 12 08:18 AM oldmaninPA wrote:

> I hope so...owning gold stocks now is like watching grass grow.

That's just the summer doldrums - stick around, it's going to get interesting quite soon enough.

Expect a sharp takedown imminently, as the Comex commercials have built up a huge short position and they don't usually put their heads in a noose unless they know something is coming.

Gold's long consolidation in the $900s will be making them nervous every time it rises towards the magnetic zone. An announcement of an extension of QE, or similar, would easily break $1000 and then they'd struggle to control it, so they'd hit it just prior and then defend $975 tenaciously - as happened in March.

The Fed's smoke and mirrors may work for a while; but when the reality can't be concealed any longer, the mood-change will be very abrupt.

Aug 12 10:08 AM

[Mark123:]

Be careful what you "hope" for.... Severe banking problems could cause systemic failures that even GOLD cant save you from.


On Aug 12 08:57 AM learnmoney wrote:

> There are a number of pro's and con's for Gold. I too am a bul and
> have been for over 3 years. However, I was always taught to take
> profits from time to time and lower my initial capital purchases
> to zero (if possible).
> So far so good except that it has been difficult to make short term
> profits from good gold mining shares and that means only the best
> ones.
> However, I agree that we are going to wait for another banking problem
> or events which causes GOLD to go up substantially.........the way
> the US government is going about sorting its mess out leads me to
> think that there is someting round the corner...............let us
> hope so!

Aug 12 10:18 AM

[PseudonymName:]

Looks like a double top to me.

Aug 12 01:28 PM

[BigOlDave:]

As the USD falls relative to other currencies and as international trade gets denominated in a currency "basket", rather than just USD, the $1,000 barrier will become increasingly irrelevant. This potential breakout is a good argument for gold as an above - average investment. Silver might even be better.

One way I play both silver and gold is Central Fund of Canada (CEF) which holds its assets in the form of actual, physical gold (57%) and silver bullion ...not "certificates".

Dave

Aug 12 02:09 PM

[Old Trader:]

Well, at least those are some REAL "green shoots"! While not a "gold bug", per se, I think gold has a place in every truly diversified portfolio, esp. if one is seeking absolute returns.



On Aug 12 08:18 AM oldmaninPA wrote:

> I hope so...owning gold stocks now is like watching grass grow.

Aug 12 05:50 PM

[Jake2:]

Not whistling Dixie but whistling in the dark maybe? You can wait and wait for gold to bounce and it just might do that, and hit you right between the eyes as it goes down. Hope is not a strategy . . . Neither is woulda coulda shoulda. With apologies to the Iroquoi and and any god bugs out there.

Aug 13 01:06 AM

[Jake2:]

. . . and any gold bugs, that is.

Aug 13 01:07 AM