It’s no surprise that gold is edging higher with what is going on with the political background and the destruction of the US Dollar. I’m wondering why it took so long. The chart above is of the gold etf GLD. It has been chopping back and forth since the beginning of Obamunism, winding itself into a triangle, with lower highs and higher lows. The breakout occurred on Sept 2nd, with a nice gap out of the triangle. The trend indicator was positive on this breakout, and a couple of nice pullbacks occurred for entry points. I like to have the trend indicator in positive mode and the double stochastic in the lower sub-graph pull back to the lower oversold level. This is just a classic buy the pullback within the uptrend. The problem with most indicators is it will not pullback enough in a strong trend. The double stochastic does a good job giving possible entry points when the trend is strong.
Of course I was taking time off from directional trading during this breakout. I saw it on the charts but did not act on it. As I get older I have a hard time multi-tasking, so I was putting all my energy on the neutral option spreads. But I was holding a core position in gold mining issues. In the old days, that is 20 or so years ago, the gold mining issues would have more leverage to the price of gold, and would usually be a leading indicator to the direction of the actual gold price. This is a relationship that seems to be faltering. Another logical correlation that is divorcing. The gold mining issues are mostly lagging behind. In the past that would be an indication that the breakout in the metal will not hold. I’m not so sure that assumption is correct in the market today. There are now more products to trade if one wants to be involved in the gold market, and the individual mining companies have other issue that can affect the bottom line despite higher revenue from gold prices. The mining issues are participating in the move up in the metal, but not to the degree that one would expect based on the historical relationship.
The destruction of the dollar, begun in most of the past administrations obviously, but exponentially accelerating by the current administration, will most likely result in gold and many commodities having prolonged bull markets. But to insure volatility there will likely be the counter effect of hard economic times with periods of deflation. Its much like the Stephen Wright joke about the humidifier and de-humidifier locked in the same room and fighting it out. Recent dollar concerns are now tipping the evidence to the inflation case. Another round of bad news could tip the balance back to the deflation argument. I’ve never subscribed to the theory that deflation will be bullish for gold. Printing money to fight deflation could potentially be bullish, but that’s like pushing on a string. The old argument seems to have its roots in the fact that Homestake mining stock went up during the depression, despite deflation. There were other factors, namely the confiscation of gold and being against the law to own gold. A mining stock was one of the only legal ways to participate in the gold market back then. Times are different now as far as the availability of products. We have ads on TV and radio every ten minutes urging us all to buy gold. The ads are now right, but these companies have been saying the same thing for more than 30 years. Gold has really been a terrible investment for most of that time compared to the potential in earnings growth with many stocks. But it is certainly an interesting trade at certain times, as it has more emotion attached to it than most trading vehicles.
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