I don’t often make market calls or indicate when to buy or sell, but…if you have been waiting to buy gold, or have a dollar-cost averaging strategy in play, today served up a very compelling buy signal for gold.
For years, I tracked and traded the gold futures market very closely, and over time I discovered that charts alone were insufficient to provide a useful trading edge; I had to incorporate another set of market indicators, which I’ll get to below.
First a chart of gold:
By this view, gold has been tracing out a series of pennants, and each time, it busted out to make new highs. Where the prior pennants were relatively modest affairs, this most recent one is far larger and far longer lasting than any of the prior ones. Perhaps that’s because gold got ahead of itself back in 2011 and had to work off all of that exuberance, or perhaps someone drew a firmer line in the sand and said "no more."
The implication is that breaking up and out of a bigger flag implies a bigger run. Of course, gold could break down from here, but with everything going on in Europe and the likelihood of QE X, and maybe even a crash landing or two in Asia, the odds of that seem rather remote.
As a final point about the above chart, notice the intense support for gold that exists between 1500 and 1550. With gold currently trading right at 1550 (as of this writing), there’s quite a bit of price support not too far below.
Over time, I learned that charts such as these were helpful, but if I wanted to trade gold on a short or intermediate term basis, I had to be nimble. An indispensible tool in trading gold was tracking shares of gold mining stocks. I quickly learned that the price of gold shares would move up or down in advance of gold or silver moving in price.
We can speculate all we want about why that might be. Perhaps the big hedge funds that are capable of moving the prices of gold would make their first move in the gold shares, or perhaps there’s some other form of inside information about imminent gold sales/purchases that gets telegraphed to the major traders of mining stocks, but the signal of mining shares moving against the current of the price of gold was not to be ignored.
I would often have positions in gold and/or silver open, and then rapidly dump them if the gold mining shares suddenly moved against my positions, meaning if I was long gold and the mining shares suddenly started selling off, I would sell out my gold positions. I learned over time that it was much more profitable to sell first and ask questions later.
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