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I am an independent investor writing at Scott's Investments ( My site is dedicated to discussing and publicly tracking historically successful investments strategies and sharing free investment resources. I emphasize empirical, historical, and quantitative... More
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  • The Short And Long-Term Picture For Gold 1 comment
    Feb 22, 2012 12:56 PM | about stocks: GLD, SLV

    Periodically on Scott's Investments I analyze the technical picture for Gold and its corresponding ETF, GLD (SPDR Gold Shares ETF). Before I get to the technical picture, let's look briefly at money supply and Gold's long-term fundamentals.

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    Gold can act as a hedge against quantitative easing and currency debasement because it is viewed as an alternative to fiat currencies. Looking at the chart below, courtesy of Chris Vermeulen via the St Louis Fed, we see the long-term expansion of M2 money supply is in a long-term uptrend:

    A decline in a velocity of M2 money stock as shown below tells us in simple terms that the M2 money supply is not turning over as quickly as it was at its peak in the mid 90s:

    Vermeulen argues regarding gold and silver (NYSEARCA:SLV) "the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal. As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market."

    I would tend to agree with the intermediate to long-term picture. Nothing goes up forever and it is important to remain flexible and open-minded as conditions change and new evidence presents itself. However I do not think the bull market in gold has run its course, especially with the Federal Reserve stating it will keep rates at low levels for the foreseeable future.

    In the short-term we can use technical analysis to guide us. Gold and GLD struggled mightily in December but rebounded in January. With the strong sell-off in December Gold's long-term uptrend looked to be in trouble, however the January rebound, albeit on lighter volume, staved off a complete breakdown. This trend has continued in February, with GLD up 12.52% year-to-date.

    I continue to monitor the upward channel in GLD that began in 2008. Of note is the brief breakout of the channel in 2011, which resulted in a strong sell-off the subsequent month, bringing GLD back within the channel. In December 2011 there was a serious threat of a breakout below the channel, but GLD regained its footing in January and has gravitated closer to the top of the channel this month:

    Since 2009 the 10 month simple moving average (in blue) has closely aligned itself with the bottom of the channel. GLD currently resides above the 10 month moving average, although the break below the 10 month SMA in December was the first significant break below the average since 2008.

    In the short-term today's move in GLD was noteworthy and we could be near a short-term breakout depending on Wednesday's action. February's high is $171.23 and GLD is touching the trendline (yellow line) that includes February's high. We actually closed just above this line today (Tuesday), so tomorrow we could be set for a higher move this week if resistance at $171.23 is broken. The next price target would be the resistance level (red line) around $175. Price support (green) in the daily chart is in the $166.50 - $166.60 range:

    No current position in GLD
    Themes: gold Stocks: GLD, SLV
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  • winningtrader
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    I think that the gold market has seen a lot of central bank interventions lately. How much and when they choose to intervene is something I don't know. Of course, I have no evidence that the CB's are intervening but the price action tells me that. So, the real game is not technical analysis but how do you predict when they will intervene and how forceful they are likely to be. Maybe this is exactly what technical analysis can do for you but I doubt it. I know it can't do it for me.
    I personally think that both gold and silver are very undervalued. Buy and hold is a good strategy when real rates are negative, money printing is the name of the game, Greece is ''fixed'' and the US budget deficit is exploding on the upside again.
    23 Feb 2012, 04:33 AM Reply Like
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