Friday, February 4, 2011

Who's telling the right story about the gold market?

In the past few weeks, a lot of people have come out of the wood work voicing their opinions on gold and where it is headed. They state their opinions as if they are commonly known facts that simply have no choice but to be true. For most of them, this is not their first time doing so, stepping out calling an end to the gold bubble when it seems as if it's safe for the bears to come out and play. Most of them have been in this business for quite a long time. Most of them have been in it longer than I. Most are much more renowned investors than myself, and most of them are wrong.

There are a lot of people I listen to on their market analysis, but simply for their interpretations of market action. There will always be things that occur that you didn't think of, this is why it is good to hear another's side of the story. But there is no need to ask anyone what the market is doing. The market will tell you! You just need to listen to it! The common opinion in the gold camp these days is that we will have a drop to about $1250-1225 area where we will be able to find the strongest support. The other opinion is that we are due for a test of the 200 day MA, which stands only about 2% higher than that 1250 support point. Why would we have a test of the 200 day MA? Well, because doing so is simply natural in markets, and anyone who doesn't understand gold, would think that this is inevitable. My friends, gold has not tested the 200 day MA in 2 years! I am of course not ignorant enough to think that it never will, but that alone should tell you something. This market has showed us bottom/top callers of all sorts that come out on gold's natural and healthy (although sometimes violent) corrections to participate in the signing of the metal's death certificate. The consensus is almost never seen. When looking at gold's correction in Dec '09, after reaching $1225/oz, the consensus, the logic, was for it to fall to a strong support point of around $1000/oz (which again was also within about 1.5% of the 200 day MA). It didn't. Instead it stopped about 4% above that point and made everyone who was looking for that "sweet spot", chase the price up higher for all of us that were buying on the way down to it.

There is though a point that gold has corrected to, that has been a bottoming point for the metal in each significant correction within the past 2 years. The only thing you needed to do to find it, is let the market show you. Below is a weekly chart of gold. The technical indicators provided are RSI (14), MACD (12,26,9) Slow Stochastics (14, 3) as well as The 200 week MA, the 50 week MA and the 30 week MA. This is pretty standard stuff to find on any given chart, other than the 30 week MA . I honestly can't think of a single person off the top of my head who pays attention to the 30 week MA on anything. So why did I put it there? Because the gold market was saying something! In the last 2 years gold has tested the 30 week MA 7 times and held every one! Not only did it hold each test, buying at the 30 week MA was buying at the absolute bottom of every significant correction! Anyone who bought gold based on that rule alone, made money every single time.

Of course we will not buy based on one thing alone, so let's look at the rest of the technical picture gold has painted for us to see. You can notice at the top, that each one of those bottoms, those tests of the 30 week MA has coincided with a bottom in RSI at roughly the 50 mark. Look at where RSI stands right now as we close out this week. 54.89 and beginning to turn upwards. Looking at the slow stochastics we can see that it is flattening and ready to turn upwards again at roughly the exact same level it was at the bottom of the correction this time last year. MACD, which has deviated quite a bit from the MA, which has typically depicted a bottom when looked at it in conjunction with the other indicators. Now, you take all that with the fact that gold stopped dead right upon the 30 week MA, sprinkle on some extremely low bullish sentiment, and viola! You have the makings for one sweet, golden, money-making rally!

I don't often write many articles but with the jibber-jabber that we have seen circling gold recently, I felt compelled to do so. I do not want to see people get discouraged and possibly sell out of their gold positions before a massive rally, because they took some half witted trader or reporter's word as gospel when they were most likely just talking their own book to begin with. There is VALUE in gold at these levels. There is value in silver as well. The best value perhaps is in the gold and silver shares. Looking at a weekly chart of the HUI index one can see the same things occur as in the above gold chart. The 50 week MA in gold shares applies the same as the 30 week does in the metal. The same situations in all indicators are right there screaming to you as well.

This market is speaking to us. All we need to do is cut out the chatter and listen to what IT is telling us.