Don’t Believe the Chart: Gold Still Looks Promising
There’s talk of hedge funds dumping gold. Despite its attractiveness as a safe haven to stash your money, there is a lack of buying interest across the board, as the sentiment toward gold is declining fast. Some are even saying the bulls should pack it in. While I agree the short-term risk is high and prices could move down toward $1,500, I continue to like the longer-term outlook, as I believe that any major decline in gold should be viewed as an opportunity to accumulate the precious metal as a contrarian investment.
We are hearing more whispers predicting prices could spiral lower, but while I’m neutral at this point, I continue to be convinced that gold will rally higher in the long term.
The jury is still out on the potential of gold. The situation in the eurozone remains fragile, but there have been some signs of improving sentiment, which is what traders want to see.
In early January, Marc Faber, also known as “Dr. Doom,” in an interview with CNBC suggested gold could correct 10% or more to as low as $1,550–$1,600. (Source: Belvedere, M.J., “‘Dr. Doom’ Faber Sees Possible 10% Gold Correction,” CNBC, January 8, 2012, last accessed February 25, 2013.)
In my view, gold continues to be a place to park some capital; and for this reason, I feel the metal will continue to attract support above $1,500 after 11 straight up years.
The chart shows sideways trading with major support around $1,550 and upper resistance at $1,800, as indicated by the horizontal blue lines in the stock chart below. Within this trading band, there’s a downward trading channel, as indicated by the downward-sloping, blue lines. The surfacing of a bearish “death cross” on the chart is a red flag. The near-term picture is bearish on extremely weak relative strength. The key, now, is support.
We saw a similar situation in February to May 2012, prior to a rally back to the upper-band resistance line. I’m not saying this will happen again, but the recent trading action suggests it may. Hence, if gold falters back to around $1,550, there may be an opportunity to buy the yellow metal, based on my technical analysis.
Chart courtesy of www.StockCharts.com
I continue to favor gold going forward, given the continued financial distress and recession in the eurozone and Europe. There’s also the ongoing tension in the Middle East.
For these reasons and others, the yellow metal will remain a great place to stash money in spite of what some pundits and the media are saying.
So, while the near-term prospects look somewhat dull for gold, I look at downside moves as an opportunity to add to existing or new positions.