Monday, September 14, 2009

Gold Closes at Record High

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Gold closed at a record high in New York on Friday. The settlement price of $1004.90 broke the previous record of $1003.20 set on March 18, 2008. The daily intraday high was $1011.90. This is gold's third serious attempt at trying to break to new all time highs. The $1000 level has been tested 5 times so far. A basic rule of technical analysis is that when a price is repeatedly tested, it will eventually break.

A yearly high is bullish and a record high is extremely bullish for any stock or commodity. You would never know it from reading the media reports on gold however. I have seen one article after another warning about how dangerous it is to buy gold at these prices, how a pullback is likely, how the small investor had better stay away, etc., etc. This is actually very bullish for gold. If the media liked it and was saying how great it was, it would probably be time to sell.

Negative media reports all focus on lack of physical gold demand at the moment, particularly in India (Indian consumers own 20% of the world's gold - at least as much as all central banks combined). While this is likely a temporary phenomenon based on when Indians consider it a propitious time to buy gold, you don't usually see that mentioned in articles. You frequently don't see inflation mentioned either and that the demand for investment gold is skyrocketing. This type of demand will eventually overwhelm all other forms of demand. You can also find many articles that report that the ETF GLD isn't buying gold and how negative this is for the market. What is not mentioned is that there are 10 ETFs on world markets that buy physical gold. Overall, there has been net buying recently. Only one of the ten ETFs had decreased holdings and that was GLD. Long gold futures positions have increased by 17% in the last week to 10 days and many investors are likely moving away from physical metal to more leveraged plays.

Gold's recent performance has been helped by the U.S. dollar. The trade-weighted dollar was as low as 76.46 on Friday, well below its breakdown level of 78.33. It is up slightly this morning and gold is hoovering around $1000. The dollar is in danger of hitting a yearly low soon (75.89 at the moment) and if that happens it could fall to its all time low below 72. Some short term rally is likely because the dollar is trading below its falling 50-day moving average. This could in turn cause a short-term drop in gold prices. This would just be another buying opportunity however.

We will be discussing the gold and silver markets at the New York Investing meetup's 'Technical Analysis - Chart Patterns' class this Tuesday night at PS 41 (116 West 11th Street). The class will be held from 6:45-8:45PM.

NEXT: Gas Takes Gas

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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