Benjamin Graham was reported as saying that in the short run, the markets are like a voting match and in the long run they are a weighing match. In a similar vein, John Maynard Keynes is attributed with saying that the market can stay irrational longer than you can stay solvent. Yes, while fundamental analysis might eventually lead the way, we can also learn much from examining the manner in which investors are buying and selling. A chart will give powerful sentiment clues.
I have found gold to behave similarly to the above quotes in that regardless of how well you analyze the amount of reserves, the demand and potential uses for gold over the next 20 years, it is sentiment that makes prices pop or drop rapidly. While not ignoring the fundamental case for gold, I will examine a price chart to come up with price targets for gold bulls.
Monthly Gold Price Chart
Equity shares often move in trends that have upper and lower limits and gold is no different. Using a monthly chart I have put a channel on the prices to determine the potential upside.
While it is true that prices can also go parabolic and exceed these limits, prices usually need to bounce back to reality for a sustainable advance. Extending the channel for the SPDR Gold Trust (NYSEARCA:GLD), I find a potential peak target of $2,600 by the end of 2012 with $1,920 being on the low end of my estimate. Of course, you need to know when a good trade turns bad, when the trend loses steam and starts breaking down. If the bottom of the channel, or trend support, was broken by prices quickly falling down below $1,500 (or $1,600 by summer)- this would be a signal to get out. While some traders like to average down on falling prices, I have found price action trading to be profitable only when buying with the current trend and selling when it falters.
Moving Averages Might Give Clues
While it may be coincidence, the 30 week moving average has indicated the bottom of every pullback of the past 3 years, with the exception of the most recent one.
Click to enlarge:
Click to enlarge
If the 30 week moving average is more than simply coincidence, we have a short-term bullish case as prices recently launched off the $1,600 threshold on the moving average. This could make another advance that might test the $2,000 mark over the next 2 - 3 months.
Other Causes for Gold's Advance
Of course, I'd be remiss if I didn't regurgitate a few fundamental reasons why gold might go higher.
The possibility of QE3 and other quantitative easing around the world
China and India buying up gold
Low interest rates
There are likely many other fundamental reasons why gold might go up, but the point here is that the 'voting match for gold' can last a lot longer yet. One difficulty with fundamental analysis of gold is how to arrive at a value. Robin Griffiths has reportedly given a $5,000 - $10,000 per ounce target at a minimum while others are not so bold (myself included).
If you are a gold bull looking for other some gold based stocks, you might want to consider some companies in a strong upwards trend such as Yamana Gold (NYSE:AUY) and Randgold Resources (NASDAQ:GOLD) or you may lean toward stocks trading down but bouncing off support such as Eldorado Gold Corp (NYSE:EGO) and Keegan Resources (KGN).
What is your price target of gold for 2012? I'm curious as to the range estimates of non-professionals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I may intra-day trade these ETFs, funds, or securities but currently have no plans to do so.