Thursday, July 12, 2007

Technical Thursdays: Forget Goldilocks, Think Gold

On April 24, 2007, I wrote about Gold and its prospects for a run to $1,000 an ounce. In that blog posting, I referenced the special nature of Gold as an investment vehicle, how precious little of its value resides in its industrial use, and that the primary value in Gold is as a hedge against instability and as an alternative to the US dollar. Given the fact that the geo-political climate has remained quite unstable (see yesterday's intelligence report re Al Qaeda, for example) as well as the prospective further weakness in the greenback (not to mention the white hot growth in Asia that has helped fuel demand), Gold's role as an attractive investment seems assured.

One concern that I hear pertains to the potential supply coming from Aunt Tilly and Uncle Willie as they cash in their jewelry and coins. While this may be a factor to be mindful of, the larger concern resides in the bullion holdings of central banks, as they dwarf the current demand/supply equation. At 9x the current supply rate, central banks could easily flood the market and depress the price of Gold in a heartbeat. While this risk exists, the likelihood of such an act seems quite remote as a catalyst for such action appears to be fairly non existent.

Investment Strategy Implications

Since the ETF tracker began trading in January of 2005, Gold has outperformed the market by a wide margin (see above chart). Over the past year, however, Gold has been locked in a trading range that has all the hallmarks of a high end consolidation. And, in the process, has enabled the 200 day moving average to approach its current price.

For both fundamental and technical reasons, Gold continues to be an excellent asset to own with qualities befitting the uncertain times ahead. The terrorist and other threats are with us for the foreseeable future. Coupled with the dismal performance of the US dollar and a domestic political climate that is both locked in gridlock and likely to become more cantankerous the closer we get to 2008, the prospects of an upside breakout and run to $1,000 is not unrealistic.

Note: To view a larger image of the chart, click on the image.

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