Chart of the week: is it time to invest in gold?

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Peter Switzer likes to keep his experts honest. “Don’t just tell us when you’re right,” he says. “Fess up when you’re wrong!”

The last time I wrote about Gold was on the 4 April when it was stopped out at $1,631 for a 2.5% loss. Just two days prior (marked ‘A’ on the chart below), I wrote an article for this Report titled, Chart of the week: can gold prices climb even higher? and placed a target of 5.5% higher. Gold was at $1,672 at the time.

The stop out was actually good. As painful as it was taking a loss of 2.5% in two days at $1,631 (marked ‘stopped’ on the chart below), gold didn’t bottom until $1,527 on 16 May. A potential loss of another 6.2%.

One could have finessed a better exit in reality, but not for the purposes of this Report. I need to keep it simple here and stick to my many rules. In this case: “If you sense you are wrong, start to get out.”

To gain an understanding of my historic thoughts on gold, which has relevance to the way Equity Markets and other markets trade, please watch this discussion I had with Peter on 21 July 2011.

The update

Below is the updated gold chart in US Dollars. As I write, gold is at $1,616 an ounce.

The trade would be to buy 20% now, buy a third at $1,574 should it get there, with a stop at $1,518. We need to be patient and accumulate.

Warning: This is not a “Steady as she goes” type of buy recommendation.

Gold at $1,616 trying to bottom: Accumulate for a 5.7% upside target

What I like about the chart

  1. The recent low of $1,522 of 29 December 2011 has not been broken. This level was threatened three times on 16 May $1,527, 23 May $1,533 and 30 May 1,531. Support has held. This is my strongest argument for the accumulate call.
  2. The red line (which is the long-term support), has been broken twice, but current price action is trading above this line, which is at $1,578.
  3. Other technical indicators not shown here are showing a bottoming structure with a good chance of a rebound up or even a new leg up. This could be the bottom.
  4. The weekly chart has some indicators that have turned.
  5. Not on the chart: Global macro situation remains unstable with focus on Europe. More quantitative easing is being discussed. This would support gold going to new highs.

What worries me

  1. The 200-day moving average (the yellow line) is pointing down. This suggests the up-trend may have ended.
  2. Above point two, long-term support has been broken.
  3. Above positive points three and four, based on indicators alone, I am early. One should not try to pick the bottom.

Actions

On balance, a ‘test the water’ trade here is justified, especially given the global macro situation mentioned in point five above.

Important note: My views are NOT for the long term. My method results in views expressed that relate to an outlook that lasts weeks or at most months. For example, my view on Shanghai’s Index has for now been met and completed since 22 March 2012, 11 days later. Currently regards Shanghai, I am in a cautionary observant position. Your utilisation of this information needs to take into account the time frame I set. The stocks recommended as “Steady as she goes” may be held for the longer term, which for me means months.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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