We Were Right About Gold

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Created on Thursday, 14 October 2010 15:42

Written by Sara Nunnally, Editor, Smart Investing Daily

Hits: 2006

In Monday's Smart Investing Daily article, I told you that gold was forecasted to go higher. But that's not all I said...

I wrote:

But Friday's action appears to have found support on that top trend line.

That sets up two technical scenarios. First, Friday's rebound could keep prices above this trend line, and with the economic factors still screaming bullish for gold, we might see prices shoot back up to the $1,360 level in short order.

The second scenario sees gold prices dip back into the established uptrend. Should this happen, you might see gold prices arch down to test that bottom trend line before continuing higher.

This would be a great time to establish a position, should you not have some sort of gold or gold-based investment in your portfolio.

But the next few days will be tricky, as gold prices try to make up their mind.

Either scenario still works with the majority of analysts' macro ideas about gold. The economic anchors around the U.S. dollar aren't going to go away any time soon. Perhaps not for decades... And in the meantime, gold will maintain its appeal as a hedge against a sinking dollar.

We were spot-on!

It appears as though the first scenario is playing out.

After Smart Investing Daily hit your inbox on Monday afternoon, gold closed at $1,353.80 an ounce, up more than $5 that day. Tuesday saw gold dip to test that top trend line on Monday's chart... Prices fluctuated as low as $1,341 before closing at $1,350.50.

But Wednesday... Boy, did we see some action!

Gold prices opened at $1,350.70 and took off... by midday, gold October futures were trading above $1,371, and as high as $1,374!

I'll admit, this happened a lot faster than I expected. And we got a much higher pop than I expected as well. We may even see gold prices dip back into the $1,360s by the end of the week. But here's the thing...

Looking out until December 2011, gold futures are all trading above $1,370 an ounce... Nearly all were up more than $25 in half a day.

That's a big mouthful to chew on, and it might be a touch overdone in the short term.

I'm not sure if you'd have a trading play to the downside, but it might be a good time to take some profits off the table.

(Investing doesn't have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy and I simplify the stock market for you with our easy-to-understand investment articles.)

Economics Still Stink

I wouldn't get rid of gold if I were a buy and hold investor, though. Economic woes still abound with financial news headlines reading like these:

• "Across the U.S., Long Recovery Looks Like Recession"
• "EU Struggles Over Ways to Prevent New Debt Crisis"
• "Dollar Keeps Dropping as Investors Await Fed Move"

In other words, the pain may not be over yet.

Long-term fundamentals support higher gold prices, and even as the Dow maintains trading above 11,000, gold will follow the lead of the dollar. Their inverse relationship is key to gold as a hedge against a floundering economy.

Be sure to watch news about the Fed's plans for buying more government debt over the next couple of weeks leading up to its November meeting.

And remember, if the Fed declines to buy more T-bonds, we could see support in the dollar's value, and sky-high gold prices could take a hit. Of course, the opposite is also true. With gold already more than halfway to $1,400 an ounce, those analysts' estimates of $1,500 an ounce by the end of the year are definitely within reach.

Watch Any Pullbacks

If Wednesday's run-up in gold prices proves too much, watch for a pullback to that extended top trend line in Monday's chart from The Weekly Gold Digger. From there, look to see how the dollar is holding up. Weakness in the U.S. dollar suggests a bounce in gold. A firmer dollar suggests a dip back into the short-term uptrend.

A key price level would be about $1,347 on any dip. At this point is when you should look to the dollar.

P.S. You should strongly consider loading up on gold... not just because the futures keep going higher and higher, but because soon you may have your right to buy gold stripped away from you.

By 2012, it probably won't be safe to own gold bars, rare coins or gold ETFs. Think I'm crazy? Read here to find out why President Obama is trying to confiscate your gold, and what you should do about it...

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