The Bottom Is In For Gold

| About: SPDR Gold (GLD)

As headlines announce the S&P 500 trading above 1400 for the first time in 3 months and as Harry Dent appears on CNBC proclaiming the Dow will drop to between 3000 and 6000 within the next three years (but only for a second) and as irrational investors (?) and traders throw money into stocks in anticipation of QE3 in September (isn't the need for another QE a bad thing?) the only thing to securely place one's conviction in is the fact that GLD has bottomed.

Technically speaking GLD, the SPDR Gold Trust ETF (NYSE: GLD), has been establishing a support level for nearly three months starting with its most recent intra-day low on May 16, 2012. That low is at the almost identical to the low achieved on December 29, 2011: 148.27 versus 148.60. Close enough in my book and very capable of justifying the call of a double bottom.

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The longer-term chart supports my thesis as well.

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Since 2005 there have been three primary periods of price increase followed by a sell-off, consolidation and then continuation of the ascension. The first peak occurred in 2006, which is followed by a sell-off that lasts for about six months. The price then begins to rise again peaking in early 2008 at just over $1000.00. A longer sell-off follows through the end of 2009. A longer period of price increase then followed, with a few mini peaks and sell-offs along the way, ultimately culminating in the record-high price spike in August 2011. A standout characteristic of these trends is the "parabolic" price spike near the end of each run and the price consolidation that followed.

Another point is that each successive period was longer, both in the duration of the rise and of the sell-off/consolidation period. Consistent with prior periods would be for investors to expect a continuation of the upward trend in line with the earlier trend line, a continuation to at least the previous high but most likely beyond. I would also look for that continuation to last longer than the prior periods, potentially bringing GLD to record highs.

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In this chart I've drawn a straight line through the center of the previous trend and extended it beyond the current trough, conservatively approximating a return of GLD to its previous high and then beyond.

Of course this analysis can, and I am sure will, be debated, however I also think the fundamentals support the technicals. And as I have written about before, nothing has changed. Well, except that the things that our fearless leaders have to stimulate growth have been done to the point that there is almost nothing left. This however does not change the argument for a higher price for gold and GLD. A factor I see overlooked at times is the changing of the currency guard.

If we set aside all the monetary stimulus that is being utilized around the world and focus on one key factor we still can anticipate higher gold prices. That factor is the waning role of the U.S. dollar as the reserve currency of the world.

We are already seeing the dollar replaced in certain transactions; we are seeing new unifying bodies of countries, notably in merging markets, being established as mutual trade entities, which will no doubt exclude the dollar in trade between the member countries in the not-so-distant future; and we still expect China to play a significant role in global GDP as well as be a catalyst for further change in the way global trade is conducted.

Therefore those of us in the United States will likely need to adjust to a further decline in the value of the dollar, and not just because "Bubble Ben" Bernanke isn't about to change his methods. I also expect to continue to see quantifiable increases in gold purchases by nations worldwide. With a changing of the guard in currency markets comes a natural inclination to hedge paper reserves with hard assets, and there is none better than gold.

Given these factors combined with what I see as a clear picture in the charts I have a hard time foreseeing anything but higher prices for GLD.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.