Monday, December 21, 2009

Gold Correction May Signal Golden Opportunity

Moses Kim discusses why he is confident that gold is a good investment right now after a price correction has wiped out a lot of the bullishness in the precious metal. While gold may stay at the $1,100 level for a while, Kim considers a spike to the $1,500 level as a feasible outcome. See the following post from Expected Returns.

The last 2 weeks have shown just how violent corrections in gold can be. Most of the momentum driven investors and weak hands have already been liquidated. Most, but not all, of the bullishness in gold has been wiped out. While the correction may still have some more legs, I believe it is time for long-term investors to buy into this correction.

Gold is very close to violating the multi-month trendline that has served as solid support. The confluence of 3 technical indicators: the multi-month trendline, 50 day moving average, and fibonacci retracement level, make $1,100 a very important level. If $1,100 is broken, I would look to $1,070 as near-term support, which corresponds with the 50% retracement level.

Ideally I would like to see gold hover above the $1,100 level while the dollar works off some of its oversold conditions. The longer the period of consolidation, the better, as it will allow me to continue to accumulate before the next blast off to higher prices.

This bull market has been characterized by prolonged periods of consolidation, followed by huge spikes up. The last consolidation was at the $900 level, bringing gold prices all the way up to $1,226. If gold can maintain the $1,100 level for the next couple of weeks or so, a spike to $1,500 is not out of the question. At $1,500, euphoria from the mainstream is likely to return, which means it will be time to lighten up again.

Now that Helicopter Ben Bernanke has been reappointed as Fed Chairman, the conditions for much higher inflation are in place. Even without inflationary pressures, a bond default would be sufficient to send gold prices flying. When treasuries collapse, what do you think the "safe haven" will be? In my opinion, the $1,100 level is one you have to buy at if you believe in the gold thesis.

Trading Plan

I plan to continue buying at key support levels and using the volatilty in gold prices to lock in profits. I will likely stop trading on a shorter-term time frame and start adding positions with more long-term conviction above the $1,140-$1,150 level. Core positions will be left untouched.

This post has been republished from Moses Kim's blog, Expected Returns.

No comments: