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Look Into Gold's Future By Studying Its Past

|Includes: AAPL, SPDR Gold Trust ETF (GLD)
I'm not ashamed to say I'm a gold bull and I'll be forthright with you: To put it in Wall Street parlance, maybe I'm "talking my book" because I'm long one of the ETFs backed by physical gold. Tuesday's decline in gold prices, the biggest slide in a year, doesn't have me worried and it should not worry investors who are involved with gold via ETFs or through their own physical holdings of the yellow metal (coins, bars, etc.)

Some of gold's naysayers will inevitably look at Tuesday's price action as a potential opening for the bears to make their presence felt in the gold market. I would not go that far. Is this an opportunity to look in some profits? Sure. Just as an example, the investor that purchased 1,000 shares of the SPDR Gold Shares (NYSE: GLD) in January 2011 is so deep in the money at this point, that selling 100 shares here makes sense. Remember: Profits aren't profits until you put them in the bank.

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At the same time, one day does not beget a trend or change in the previous trend. In other words, history is important in the case of gold and we don't need to go back too far to learn some important lessons. Indulge me as I run through a couple of headlines. "Gold is Overbought." "Gold is 'Hyper-Overbought.'" "Soros Warns of Gold Bubble."

Now I know folks can be sensitive about these types of things, so let me be perfectly clear: I'm not calling anyone out here and I'm certainly NOT saying the sources of those headlines are dumb. In the case of the first two, they come from sources I have deep respect and admiration for. (The third is more of a general news headline.)

The first headline comes from a research piece that was published in early 2009 when gold looked overbought at just under $900 an ounce. Here's what the chart looked like back then.

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The second headline pertained to some comments a noted commodities trader/analyst made in late September 2010. Back then, GLD was trading around $130. George Soros warned of a gold bubble a couple of weeks before that. Point is gold's unfathomable run has vexed some of the sharpest minds in the investment community.

More important than that is what many are clinging to as the most used criticism of gold in the near-term and that is it is overbought. Well, if it was overbought at $900 an ounce, again at $1,300 an ounce and probably every $100 an ounce between $1,300 and $1,900, it stands to reason naysayers are going to keep saying its overbought.

Overbought and oversold indicators are useful, but as a former professional trader, I assure you, their usefulness is not unlimited. Some said Apple (Nasdaq: AAPL) was overbought at $200. They said it again $300 and someday, when Apple hits $500, it will be "overbought" there, too. Apple will eventually get to $500 because people are hooked on iPhones and iPads. The overbought players will lose this game in a big way.

In a similar vein, gold will continue to rise because when we wake up tomorrow, next week, next month and probably next year, the U.S. dollar will still be nothing more than a fiat currency and Europe's sovereign debt woes will still be around.

Gold's run reminds me of something so obvious that when I first heard when I was rookie trader I was almost insulted, but I carry it with me to this day: There is a limit to how far a security can fall. It can go to zero and not below, but there is no ceiling to how high it can rise. I wish I had a crystal ball to tell you where gold prices will stop rising and where the trend ends. Alas, I don't, but I can say the overbought thesis hasn't worked for about $1,000 an ounce.


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