How I Called the Breakout in Gold Three Weeks Ago
Back in early January, I wrote an article that focused on a bubble forming in the Treasury bond market. Back then I saw money getting ready to jump from one seemingly safe asset to another…gold. (I wrote about this on January 2nd.)
This was my first “tip off” that money was about to start flowing elsewhere and gold was the next logical choice since it has held up fairly well in this bear market downdraft.
So when bubbles form, you have to ask yourself, “Where will this money go once it starts flowing out of U.S. treasuries?” Money was still in “defensive mode” and I knew that it still wanted to “run for cover” but was getting uncomfortable in being in the treasury bubble. Therefore, the next “stop off” that seemed stable to many investors would be gold. That’s how I came up with my thoughts for the January 2nd article.
Then on Jan 22nd-23rd, I wrote a “two part” article about why gold was going to break out to the upside soon. At the time, gold was trading at $853 an ounce. Yesterday, gold was $100 an ounce higher, piercing the $950 level.
In the second article, I provided a chart of gold before it broke out and gave some reasons why it would break out.
Aside from the bond bubble, I saw the money supply exploding and a stimulus package coming that would eventually flood the market with money (once the government got the Drain-o out and unplugged the banks). So that is a bullish thing for gold as huge sums of dollars are printed, it eventually dilutes the value of the dollar and boosts gold.
However, in the mean time, while we’re waiting on that to happen, I also see that “fear” was dominate in the markets as we had a new administration coming into office (with the uncertainties that it brings) and a bear market in stocks and a global slow down. All of this would take time to work itself out, and that is bullish for gold now…even before the eventual inflationary story kicks in.
South African mines – the icing on the cake!
Also, I noticed that South Africa (one of the biggest gold miners/exporters in the world) was having electricity problems that were causing a 14% slow down in gold production which hasn’t happened since the 1800s. That slow down in production was also bullish for gold (less supply, yet growing demand).
Then on top of this, we have U.S. interest rates which are right at zero. That will unleash its own inflationary effects at least by latter 2009 to early 2010.
Also, I noticed that gold has held up relatively well even though the dollar has rallied strongly in the previous months. I also noticed that gold has held up better than most other commodities out there. So there was quite a bit of “relative strength” that I saw with gold. Imagine what it will do when the dollar does actually start to crumble once again?
So what do smart investors do when they see all of this? They position themselves AHEAD of the move like a surfer that looks for his wave to come. Then the investors ride this fundamental wave for quite some time to come.
This is exactly what they did. The smart fundamental investors positioned themselves just ahead of the breakout while the technical investors (chart readers) bought in right after the break upward. Both are enjoying nice gains right now.
In fact, gold is one of the few investments out there breaking higher right now. Check out the chart below.
Gold consolidated “multi year” gains and then broke higher!
Here’s how you can get in on this gold rally?
For the investor: You can buy the Gold ETF (GLD) through your stock brokerage account. I encourage the purchase of ETFs over the commodity contract because you can buy with cash, no margin and you don’t have to worry about expiring contracts this way either. There are other gold ETFs out there but most don’t have the volume that this one does and so they would have wider spreads to overcome and possibly may not have quite as good of fills on your orders due to there being less liquidity.
For the trader: You can use the Gold Double Long ETN (DGP). Remember, that this will be much more volatile and therefore carries more risk. However, for a near term trader that wants to trade the newly formed uptrend, this could be one way to do it.