Why I'm Still Holding Onto Gold

I regret that I do not own more. Gold gapped upwards almost four percent on Thursday, the day after the Federal Reserve demonstrated that is was still not ready to get serious about fighting inflation (and it cannot without crushing the fragile American economy). I am regretful that I did not turbo boost the gold impact with my favorite gold mining play, Goldcorp (GG), since on Friday, GG made a new all-time high and was up 13% for the week.

Gold corrected steep and fast into the climactic March lows for the stock market, and numerous gold skeptics were quick to write off the yellow metal. I re-established a position anyway. Every bounce in the dollar since the March lows has had folks cheering the comeback of the greenback (never mind that a weak dollar is the only thing propping up corporate profits and the U.S. economy, such as it is). Every dollar bounce seemed to confirm that gold was "done." As inflation engulfs the globe, gold appears to be on the verge of a breakout similar to the last one that sent it hurtling to $1000. The Federal Reserve continues to tell us that "...the Committee expects inflation to moderate later this year and next year."

Despite all of this, "recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending." Finally, admittedly, "the upside risks to inflation and inflation expectations have increased." It is all very confusing, this rebound in growth with lower inflation. I think I will choose "normal" over "hopeful" economics and hold gold in anticipation of even higher inflation with increases in demand for oil, food, and other commodities. Who knows? If the economy fails to rebound as expected - and the second-half recovery is looking like so much fantasy now - we might see further pressure on the dollar and more support for gold.

Anyway, back in January, I was quick to point out the breakout in gold. It made me regret selling my entire position in late 2007, but I never got the pullback I wanted for re-establishing my position. Perhaps this created my over-eagerness when gold corrected back in March. I also thought that the former breakout point of $800 would be re-tested and provide my second potential entry point. I never quite got it.

The following chart provides a price-based technical summary of where gold stands. Until the Federal Reserve actually begins a new rate cycle of increasing rates, I will hold onto my gold.

Be careful out there!

click to enlarge
 

 

Full disclosure: Long GLD. 

Comments

[frank90291:]

"GOLD IS GOOD".......... been in it 3 years and since the dollar which is being destroyed by the fools in Washington and on Wall St. it looks like I'll be in it a lot longer....... Swiss francs (FXF) are good too....... I sold all American junk and have been heavy into Canada (EWC) and Brazil (EWZ) for over 2 years........... DJP is a favorite .......it's all about things in the ground and grow out of the ground from here on out folks, believe it.......... BUT, be sure to set your stops... :) :)

2008 Jun 29 10:57 AM

[GMiki1:]

People who invest should study the sectors they invest in. Those who are in gold and study gold know gold is simply set to go higher. In fact, anyone who studies markets understands about pullbacks after a fast ascent.

I love the Livermore story about the old guy who refuses to get out of a stock and take a profit, saying simply, "I don't want to lose my position... We're in a bull market."

Livermore learns that the reason he has had some success in the markets but hasn't become rich yet is that he keeps selling too soon.

2008 Jun 29 11:40 AM

[sickofthehype:]

Gold has done well in the inflationary environment but is poised to fall like any other commodity that's bubbled over. I agree it's been a good investment for the past several years, but moving forward you'd be an idiot to buy at this stage.

2008 Jun 29 03:32 PM

[GMiki1:]

John, Inflation? You ain't seen nothing yet. You think it's OVER? OMG. Noooooo.

2008 Jun 29 06:26 PM

[Hieronymus:]

we're in the 4th inning, perhaps bottom of the 4th. Commodity bull markets historically last 15 to 20 years. the last one went from the mid 60's to the early 80's and went alot farther than anyone expected. I will sell gold when mainstreet jumps in and we are a long way from that. Lines at banks to buy coins would be just the kind of thing to kill the bull. The banks haven't even started advertising this but they will when the pain of financial asset losses and inflation become too great.

2008 Jun 30 08:33 AM

[BrunoT:]

The Author's error points out why fundamentals matter and technical analysis doesn't work. At least not in this environment. Gold is going to over $2,000, trying to time various dips and crests based on the shape of a graph is fine if we were in a stable economic environment, but we're not. It's like watching water slosh in a bucket, timing each wave, except someone is kicking the bucket.

As for John's comments. I'm curious why he thinks inflation is anywhere near over. With 1/2 TRILLION dollar budget deficits it's almost by definition going to continue. There WILL be further govn't bailout programs too, such as the mortgage bailouts being worked on in congress now, plus others to come. We could conceiveably see $1 Trillion deficits within 1-2 years.

2008 Jun 30 09:52 AM

[EE:]

Hi folks, Please read Butler at butlerresearch.com INFLATION is just getting started since M3 has grown at 15%+ the last 9 YEARS OR SO. Gold is not rare, but silver is and has many industrial uses. Gold & Silver are both manipulated buy huge concentrated short positions to low price levels. The silver manipulation will end first due to current short supply and industrial demand. When investor demand increases in this tiny silver market it will far out perform gold which will still be manipulated below the correct price. When you buy these metals, take delivery, as allocated programs are increasingly headed to defaults. Butler explains why. Take a bunch of time to understand! Also, sign up and resister for Hommel's silverstockreport.com If you don't study these sites in detail you are clueless as to silver & gold,

2008 Jun 30 10:02 AM

[waldipup:]

I'm holding GG since 5 Doc - have never sold one share.

I'm not smart enough to time/trade the market , so I just have to do the best I can with my limited capabilities.


GG has just broken not only its previous high , but a reverse H&S pointing to an initial goal of 55 .

Since 45 is the breakout point , it woulde be a fortuitous spot to take a shot , either now or on a later retracement back there ( to test the neckline ).

Gold itself has also broken out of a H&S bottom on Friday , with an initial goal of -

Around the all-time highs.

Buying around 920 or so is a conservative play because if the H&S breakout fails , you can exit below the neckline and consider it a conservative , low risk , low cost trade.

If the neckline holds , the breakout is valid , and the price moves up towards its tech goals , (or eventually much higher!) , you've hit a home run.

Ditto for GG.

John -

I actually understand your comment and view it less harshly than the other guys do , because your premise in general is a good one to follow.

But I believe you are underestimating the stage of the market which we are in.

EVERY bull market moves up " a lot" , but then moves up "a lot more".

You are picking a top , but it may just be a resting/correction point.

This move exceeded the 79-80 high of 800's for the first time.

So far , all it has done is continued on up from that historic breakout to 1030 , and corrected to test the 79-80 peak.

Now it has turned , to a large probability , technically bullish again.

Granted it ain't 250 anymore , but Berkshire Hathaway ain't two bucks a share anymore either , and it's been rising and rising anyway!

Ditto oil from its first peak at 80 , down to 50 -

And if you insert your comments there , guess what happened next?

Anyway , as John Fogerty said ,

It's just a thought.

2008 Jun 30 11:27 AM

[Kelly Liebe...:]

There is hardly a need to watch the markets anymore or read technichal analysis. One need only step 40 miles outside LA and look at the tent cities to know that we are in a crisis beyond which can be repaired in the next decade.
The dominos are falling and the best we can do is to go back to the basics. While we are holding metals, don't forget to make a few runs to Costco for some basic supplies. Things will be getting a whole lot worse before it gets better....

2008 Jun 30 12:25 PM

[Bingo 2:]

Has anyone heard the rumor that the Feds have been regularly raiding our own gold supply in order to keep the rest of the world from asking us to pay up on our debt? Some suggest our gold reserve in Fort Knox has been removed down to 25/30%. I mean after all the Bush Administration has to use something to convince the rest of the world we ain't broke.Our paper money has very little value and the fools in Washington have to do something- right?

2008 Jun 30 12:29 PM

[User 30121:]

GMiki...right on! EE...thanks for your providing a great service. I only hope there are lots of takers. I learned of this tandem, Butler and Hommel two years ago, and I am VERY pleased.

As for johndough110...I AM AN IDIOT! The reason: I have hesitated buying a LARGER safe for my silver and gold! You may want to rethink your position. Ask EE, GMiki or me, we all would be GLAD to provide some info/data on why you may want to. On the other hand, your shortsightedness just just means that there will be that much more gold and silver for us!

2008 Jun 30 04:45 PM

[GMiki1:]

User,

I just put the bullion in the closet. :) Really. I finally called in my order for the 500 silver eagles at Miles Franklin. And silver is on a nice roll today.

2008 Jul 01 01:36 PM

[GMiki1:]

Kelly, Oh, yes, I have enough toothpaste for the next decade--plenty of tuna, too and water filters galore. :) miki

2008 Jul 01 01:38 PM