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Jeff Diercks
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Jeff Diercks, is an investapreneur and recovering CPA. He actively trades his own money and manages the assets of a select group of clients at InTrust Advisors, a Tampa, Florida based wealth management firm focused on trend following and price momentum strategies utilizing ETF securities. Mr.... More
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  • Why Isn't Gold Rising? 0 comments
    Feb 25, 2013 8:50 AM

    The price of gold has continued to consolidate for almost eighteen months now since peaking at 1923.70 an ounce in September 2011 Given the reckless money printing by Central Banks around the world and the emergence of a middle class that wants to live a better, more prosperous life in many developing countries does this make sense that gold should be consolidating here?

    It is no secret that money managers around the world are nervous at the amount of central bank money printing that is occurring not just in the U.S., but around the world. Money Manager Bill Fleckstein recently stated in an article on MSN Money that:

    "They are then going to use this literally worthless paper they have conjured up to buy the bonds of an organization that is backed by the same insolvent entities that are issuing the paper that it intends to backstop. The whole concept is rather comical, but to me this one act is a perfect illustration of where we are in modern-day finance.

    The fact that the gold market doesn't go berserk on a daily basis just shows you that an enormous chunk of the G-7's population is still oblivious when it comes to this sort of lunacy."

    So why isn't gold going "berserk" as Bill Fleckstein questions?

    The Business Insider recently reported that Central Banks around the world bought 534.6 metric tons of gold last year. This is the highest level in more than 50 years.

    However, they also reported that a drop in consumer demand more than offset this buying as you can see in the chart below, courtesy of The Business Insider and the World Gold Council. This chart shows gold demand in tons and also the price of gold (the gold line).

    (click to enlarge)

    So why is consumer demand for gold declining? Why aren't consumers following the lead of the central banks who obviously know how all this money printing is going to end (badly)?

    I think the answer is gold got ahead of itself. It was a another bubble!

    When the price of gold rises in value for over a decade without a significant consolidation, you should certainly expect a correction or consolidation at the very least! That correction or consolidation you would expect should last years, not months on a run of such length.

    The rise in gold started in 2002 with gold at roughly $300 per ounce. At is peak, gold hit $1,923 per ounce in 2011 that is a rise of $1,623 per ounce or 640% in just shy of ten years. Now that is a big move!

    (click to enlarge)

    I believe consumer demand is off due to a perceived feeling by individuals and money managers that the worst case scenarios have been taken off the table by world governments, either right or wrongly perceived.

    In the case of money managers, they have rotated to where they believe they can get better short-term returns. No manager can afford to have too much of his or her portfolio is an asset that is just moving sideways in price.

    So what does the future hold for gold?

    My opinion is gold is not going away. In fact, I think there is a pretty good chance it heads much higher. The real question should be one of when will this current consolidation end?

    So here is my guess (and I do mean guess)!

    (click to enlarge)

    If you look at the current two year chart for gold and you extend the current consolidation ranges, you have what we call in the business an asymmetrical triangle (black bold lines). Now the book on such triangles according to StockCharts.com ChartSchool is that they are continuation patterns. This means that if the consolidation occurred after a significant rise (i.e. gold), the price pattern generally continues in that direction (i.e. upward).

    So if this is true, the next question has to be when?

    Now here is where the guess work comes in. If you look at the current chart, above, this pattern has a finite amount of real estate with which to travel. My experience is that such patterns rarely continue to the point of the pattern. So my guess therefore is gold must rise and break out of this pattern sometime in the next 12-16 months.

    On a more immediate basis, gold is near strong support at 1550-1560. It may take a few weeks, but chances are gold is travel toward the upper black pattern line sooner rather than later if it can hold support in this area. If it cannot hold support, well then we do have a problem and one that could lead to much lower gold prices.

    So bottom line…..gold is still a must own in many portfolios. It has been dead money since late 2011, but will likely perk up in the next few weeks and breakout to a new uptrend in the next 12-16 months. So be patient, gold may yet have another day in the sun!

    What are your thoughts? Are you one of the consumers that held gold and now does not? If so, please share with us why you lightened up on gold in the comment box below.
    Themes: Gold
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