Gold Bullion is Beginning to Shine (Again)

Written by Kane Cotton, CFA, on August 31, 2012

The fundamental case for gold has been challenged by many this year. Obviously, the recent price action has been more difficult to read. But gold has once again caught the eye of investors following the accommodative statements from the ECB and our own Fed.

Gold has firmed on comments from Global Central Banks
Daily Chart of Gold Spot Prices (Jan. 1, 2011 – Aug. 24, 2012)

Daily Chart of Gold Spot Prices (Jan. 1, 2011 – Aug. 24, 2012)

The chart shows the spot price of gold bullion since the beginning of 2011. After a long and drawn out consolidation after the parabolic rise to 1,900, gold has recently found some short-term strength. (Short-term support/resistance is represented by the green lines while longer-term support and resistance is represented by the blue lines.) Over the last year, gold has successfully tested the $1,550 level numerous times, and much of that time was spent below the 50- and 200-day moving averages.

Now gold sits above both moving averages, and it has broken short-term resistance near 1,630. While the bullion is overbought (see RSI) in the short term, the likelihood that it will test the resistance trendline near 1,700 has risen substantially.

Should 1,700 be exceeded and hold, the next likely resistance would be around 1780 and then the cycle highs of over 1,900. A bearish case would gain steam should the recent gains falter and support breaks below 1,550.

To be clear, we believe Mr. Draghi when he says “whatever it takes.” We also believe Mr. Bernanke when he says “we stand ready.” Their statements have been supportive of bullion, and while a “sell the news” setup could be in the making if they do come forward with policy action, we would view such action on the fiat currency front as positive for gold prices in the longer-term.

Position disclosure: I am long GLD.

Data source:

The opinions expressed are my own and are for informational and educational purposes only. These opinions are not a recommendation or solicitation to buy, sell or hold any security. The information in this article has been researched and is believed to be accurate, but readers should not make investment decisions solely on this information. Talk to an advisor before pursuing any investment strategy. Past performance is no guarantee of future results. Investment returns and principal fluctuate through time so shares may be worth more or less than their original cost when redeemed. Current performance may be lower or higher. Indexes are unmanaged baskets of securities that are not available for direct investment; they do not reflect the deduction of advisory fees or other investment expenses such as taxes and transaction costs.

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