Monday, June 21, 2010

The Long-Term Bullish Trend In Gold

Moving in and out of gold in response to short-term trends is a risky strategy. By examining long-term trends in the economy and the decline of public confidence, it is clear that gold is well positioned to rise in the near and foreseeable future. See the following post from Expected Returns.

It's that time of year again when gold bears go into a self-inflicted, shame-filled, multi-month hibernation. Gold continues to be the most "crowded" trade around as confidence in the global currency system collapses and as citizens riot around the globe. But oh wait, jewelry demand in India is down so it's time to sell gold!

Gold bears fancy themselves as contrarians, when in fact, they are stuck in the delusions of their mind. Investors who succeed in the long run constantly question their paradigms. I too had false preconceived notions about gold until I (gasp) opened a book and tried to understand its real underlying fundamentals. I soon figured out that most people had no idea what the hell they were talking about. As you can imagine, this is an investor's dream. Skepticism is fuel to the fire of any bull market.

Technically gold looks very strong. Most technical analysts would tell you the following chart is bullish. In the short run you have rising moving averages and a confirmed ascending triangle pattern.



Most people would also agree that the following long term chart is bullish. Gold has not gone parabolic yet.



So my question is: Why do people insist on fading this obvious bull market? It just makes no sense.

I hope my readers are thinking beyond the grade school level at this point. Don't give deflation and jewelry demand arguments any more thought than is warranted. Gold can rise in a deflationary environment and also when jewelry demand is weak. Gold also rises at turning points in public confidence. If confidence in our leaders were a stock, its current price action would resemble that of Fannie Mae, Lehman, and Bear Stearns before their respective collapses. In other words, confidence is on its way to 0.

I've been pretty firm for months now that this is the beginning of a monster intermediate term move. Don't get too cute trying to trade in and out of this market. The gold thesis is predicated on long-term fundamentals that are irreversible. Whenever you lose faith in the gold story, just listen to a Ben Bernanke speech; he is your number one ally. Bernanke is trying to prevent a Depression-style deflationary collapse when the conditions between then and now are different. This is a big mistake. The result will be an inflationary spiral and much higher gold prices.

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

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