I don't do technical analysis. The only candlesticks I look at are on the dining room table. However, I saw this chart here and it was just too good to pass up (full credit for the chart goes to Eric Steiman, who wrote the original article featuring the chart).
I am not an economist, but I do understand a few basic principals with commodities:
- The price of commodities are driven by supply and demand
- Currency-commodities like gold and silver are demanded primarily to hedge against paper currency
- A perceived weakening in paper currency will thus drive the demand of precious metals
There is a hidden consequence to the paper currency weakness: companies make money in paper currency. Therefore, when perceived and actual value of a paper currency degrades, a company makes less money, without really changing a thing. This is called inflation and affects the little guy and the big guy.
This brings me to one last point. In any investment, there is a psychology of speculation that must be controlled. Ever since the Dutch Tulip bubble of 1637, amatuer and professional investors have been suckered into catching the wave just as it crashes. With the chart I showed at the open of this article, it appears to me that the Gold wave might be right at the edge of crashing.
I'm going to finish this out with one of my favorite excerpts from Peter Lynch's book "One Up on Wall Street". Its on page 77, and the heading is called "The Cocktail Theory"...he talks about 4 stages of the market as graded by conversations at Cocktail parties. Here is what he has to say about the 4th stage:
"In stage four, once again they're [his non-investor friends] crowded around me - but this time it's to tell me what stocks I should buy. Even the dentist has three or four tips, and in the next few days I look up his recommendations in the newspaper and they've all gone up. When the neighbors tell me what to buy and then I wish I had taken their advice, it's a sure sign that the market has reached a top and is due for a tumble."
You just can't say it like Peter Lynch can!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.