Gold spent the majority of this week around the $1650 price level, setting up a wonderful buying opportunity -- the best I've seen in quite some time. Here's why:
None of the fundamental factors have changed. The world still has too much debt and there is no way this debt can be repaid; moreover, the monetary authorities of the world continue to signal that their bias is inflationary (see the recent comments from the Bank of International Settlements as an example). In the United States, M2 money supply continues to rise.
The MF Global situation, in which client funds were basically seized by the broker, illustrates just how severe the counterparty risk situation is. Gold's virtue lies partially in that its ownership status is very clear; it is not attached to debt. Counterparty risk and the threat of systemic breakdown are very bullish for gold.
Amidst this extraordinarily favorable background the price of gold has corrected severely, and has taken bullish sentiment with it in the process. And as a technical trader, I'm particularly delighted to see gold sitting right near its 30 EMA on the weekly chart -- a level that has historically sent bulls rushing in. Moreover, on the daily chart, we find the 200 EMA at around $1620, as well as strong support at $1600.
Because of these factors, I think now is the ideal time to buy gold. Of course, the ideal time means that if price does not bounce upwards from here, it may be time to sell. Personally, I may liquidate some (but not all) of my gold position if the weekly chart does not show bulls stepping in to defend this price level at the end of this week; specifically, a close below $1600 I would take as a bearish sign. This is only because I maintain a particularly large gold position on a relative basis, and so must take a more proactive stance to manage volatility. For those with a less aggressive gold position that mainly view gold as an insurance policy (rather than a wealth growth strategy), I don't think there is any cause for concern; the situation reminds me of the tendency of bull markets to drop and shake out the weak hands before soaring off to new heights. For those who have yet to acquire gold, now is an opportune time to do so, as the previous behavior of price at the weekly 30 EMA during this 11-year bull market in gold reveals.
Of course, in the wake of the MF Gold scandal, what type of gold to own is becoming an increasingly important issue. MF Global clients have learned the hard way that futures gold contracts are subject to confiscation; I would argue that shareholders in the GLD ETF are also exposed to such risk. Gold in one's possession is a good bet, as well as gold with a depositary institution that stores your gold in a vault on an allocated basis (meaning you simply have a share in some fund). Gold held in safety deposit boxes in lending banks is not safe and subject to the same type of shenanigans MF Global clients have experienced.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
