Sunday, September 29, 2013

Gold: do not buy on a downward trend

There has been rather a lot of talk about how the demand for physical gold for jewelry, particularly in China and India, is in some way about to support the price of the precious metal. Mutterings about dark deeds, amounting to manipulation of the spot and futures prices by one well-known trading institution, also abound. 

The facts of the matter are more mundane. When the recent financial crisis, which is not yet over, began in earnest, many investors sought safety in gold as a haven against serious damage to the world's bond, equity and currency markets. Others, such as John Paulson, believed, or claimed to believe, that Quantitative Easing (QE) in the US and elsewhere would result in massive inflation and so bought gold to protect against that particular possibility. 

The long-term chart above indicates that prior to the period mid 2007 to late 2008, gold was trending upwards alright, but never at a rate that would take the price out of the hundreds of dollars per Troy Oz. in the short to medium term. This is the true reflection of the demand for physical gold. 

Then, when the financial crisis became the iceberg that loomed up in front of the ship of global economy, in the form of the collapse of Lehman Brothers in September of 2008, gold really took off. 

The chart shows this, and also the long term trend. Now QE will end, the only question is the matter of when. With the withdrawal of Quantitative Easing which, along with generating fears about inflation, also provided the cheap money for speculation (remember gold has no utility - it is not used in quantity in manufacturing, unlike other precious metals), gold will revert to its long-term trend.

Where does that reside now, in terms of price? If you examine the chart you will see gold is now heading down towards the above mentioned long-term trend line and could interact with it at the $1000.00 level. This has the characteristic, as well, of being a nice round number of the kind that is much loved by the traders who determine where support and resistance levels should come into being.

The weekly chart below shows the dominant trend at the moment, which is down. Price is below the 200 period Simple Moving Average (SMA) and until it moves above this again the trend will continue to be down.

There is a well established principle in trading: you do not buy on a downtrend.

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