Wednesday, October 7, 2009

Gold Makes History

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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Yesterday, gold finally broke its intraday high of $1033.90 set in March 2008. Not only did it break it, but it closed above it. The COMEX close was $1039.70 and at 4:00PM New York time gold was trading at $1042.70. The breakout was text book perfect - a gap out of a long base to all time highs on high volume. The technical indicators were extremely bullish as well with the RSI above 50 and rising after having bounced off 50; the MACD above zero after having just made a positive cross and the DMI trend line announcing a new up move (see a daily chart of the major gold ETF GLD as a reference)

Yesterday's move in gold will be mentioned in financial history books well into the future. It will be seen as a significant turning point announcing a long period of inflation and the early phase of a huge bull market in gold and silver. There are analogies to the Dow breaking above the 1,000 level in 1982 and rallying over 10 times in the following 18 years. Gold may indeed rally that much and possibly considerably more, but it is not likely to take nearly as long. For those who have not been following the blog, the New York Investing meetup first recommended gold at $740 in September 2007 and we recommended selling it at $1000 in March 2008. We then recommended buying gold again when it fell back to $740 (gold traded as low as the very high $600s). We did not recommend selling gold again last spring when gold hit a $1000 again with the idea that the following drop would be considerably less this time. This trade did indeed remain continually profitable. We have been anticipating the current breakout for the last few months and telling people to position their portfolios for it.

What should investors do now assuming you already have your full positions in precious metals and their miners? You can consider taking profits some time around next March. Gold tends to peak in the spring. However, the peak this time may be either shallow or short. It is possible that this gold rally will last for around the time length of the base, which is 18 months. This would mean a significant peak could take place around March 2011. So if you sell gold in March 2010, you may have to be nimble about buying it back. It is likely that it will be worthwhile taking some profits in precious metals and buying oil with them some time early next year, so keep this trade in mind.

As for price points, there are two areas of significant resistance on the upside. The first is in the $1300 area and the next one in the $1600 area. If gold is selling at one of these points by next March, that's the time to sell some of your holdings. The $1300 resistance comes from the top line of a channel that gold prices are moving in. Some forecasters have this number below $1300 at the moment while others have it as high as $1370. This number continually moves up over time and it will be much higher next March. You can also project a rally move as being at least the depth of the base, which is around $340. Add this to $1034 and you get about $1370. However, this is likely to be much too conservative in this case. The base for gold is quite long and should be good for a rally that is at least double the depth of the base. This would take gold to around $1700. There is also a Fibonacci extension at $1673. Some pause will be needed around $1300 before gold can move up to this higher target. If gold can get to the $1300 area by the end of this year, the $1600 area is a highly likely by next March.

As for a high in 2011, this could be anywhere between $2,000 and $2,600. We will revisit this in the future. New York Investing meetup's long term projection for the peak price of gold is between $5,000 and $10,000 (we made this in March 2008) and this assumes that hyperinflation will not take place... not necessarily a good assumption any longer. We do not currently anticipate a high for precious metals until around 2017, so there will lots of profitable opportunity in these assets for many years to come.

The New York Investing meetup will be having a class on Commodity Investing at PS 41, 116 West 11th Street (at 6th Avenue) on Thursday, October 8th. I will be reviewing the gold and silver markets at the beginning. The class will run from 6:45PM to 8:45PM. If you haven't preregistered just show up and you can register and pay at the door ($20) Please see our website for more details (

NEXT: Desperation Time for the Dollar

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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