Gold Dips!

“The greatest of all infidelities is the fear that the truth will be bad.”

-Herbert Spencer – (1820-1903) British author, economist, philosopher –

We might as well start the week out right and talk about gold. Today we see typical behavior with respect to the yellow metal as it grew gradually stronger in the morning as the spot price traded as high as 1,263.90. Then at 11 am EST someone came in and knocked the price down to 1,234.70 in a matter of thirty minutes or so. Right now at 12:35 am EST the spot price is trading at 1,242.50, and if things run true to form, the spot price will eventually crawl its way back up toward unchanged, or maybe even slightly higher. We saw similar reactions last week, it’s a commonplace occurrence going back more than a month, and investors find it upsetting. I know it upsets them because I read their e-mails! The problem is a matter of perception.

Investors look at the bull market in gold the same way they looked at the bull market in housing or the NASDAQ, and that is a big mistake. They fail to understand that both the NASDAQ and housing were government nourished bull markets in the sense that they promoted it and did everything possible to prolong it. The opposite is true with gold. The Fed does everything possible to suppress the price of gold and as a result gold acts differently than what most people would expect.

Below I have posted two daily charts with respect to the movements in the price of gold. The first highlights the secondary trend:

while the second highlights the tertiary trend:

In both charts you can see clearly that price is trending higher and is not in jeopardy of breaking down. In the second chart you can also see that since the last significant decline in late May, gold has traced out three higher highs (horizontal green lines) and three higher lows (horizontal orange line). What’s more you can see that RSI, MACD, and the histogram are slowly “grinding higher”, with the emphasis on the word grinding. From the bear market bottom in 2000 until late 2009 gold was characterized by explosive moves in both directions, but this tertiary trend marked a change in behavior. Gold now grinds higher day in and day out and attempts to push it lower only make it grind that much more.

No matter how good of an analyst you are, how sure of yourself you are, or how unemotional you are, doubt can always creep in. One of the best remedies for doubt is to focus on a Point & Figure chart as it reduces everything down to the most important of all variables, and that’s price:

Here you can see that gold maintains a bullish price target of 1,310.00 and that is still 7% above the current price. What’s more the fact that the primary, secondary, and tertiary trends are all pointed higher, and in no danger of being overbought thanks to gold’s grinding action, tells me that we’ll soon see higher gold prices. First the yellow metal will tackle strong resistance at 1,298.10, and then it will go after the next level of resistance at 1,372.80 by late summer.

A look at the Point & Figure charts for both silver and the HUI tell a similar story:

and that’s important because it means that all three elements are now on the same page and working to support each other. What’s more you can look at today’s action in the HUI and you’ll see that it’s actually held up quite well (down four points at 12:20 pm EST) in spite of the weakness in gold. Likewise July silver is holding above good support at 18.86 and that is the type of behavior we would look for and expect in a strong gold market.

In a world full of economic, political, and moral uncertainties, and where the rule of law is an afterthought, it only stands to reason that smart money would run to gold. That’s why it’s still in the second phase of its bull market. The general public has little or no knowledge of gold and the price will truly not surge until the general public piles in, and they will. It’s just a question of when. One thing to keep in mind is that the act of buying gold, either in physical or paper form, does not guarantee that you’ll escape the brunt of the economic problems coming down the road. Confiscation, markets like the COMEX that could fail, taxes on precious metals, bank failures that take you security deposit boxes with it, diluted gold bars, ingots, and coins, and exorbitant storage costs are just a short list of the problems that you could face depending on where you live. Then there will be problems of civil unrest and looting as mobs try to take matters into their own hands. Buying gold is only half the battle; hanging on to it will be the equally important other half as we head for challenging times.

PORTFOLIO SUMMARY (thru June 25^th)

CONTRACT     ACTION   #     INITIAL PRICE     CLOSING PRICE      GAIN

Sept Dow          Short      2           10,210                   10,099                2,220

Mini-SepDow   Short      1             9,850                   10,099               -1,250

Dec Gold           Long      1          1,219.0                  1,256.2                3,720

Dec Gold           Long      1          1,248.0                  1,256.2                   820

*July Copper   Short      1             293.0                     304.0                  -550

Aug Oil             Short      1             79.65                     78.86                   790

*Sept Bond      Short       1           124.08                   123.28                   341

*Position closed

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June 28, 2010