Gold: Consider Your Time Horizon
May 4th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Gold has declined sharply since the bearish engulfing candle proved valid back in March (NOTE: Gold has now broken down and out of the fan pattern in that post.) In my opinion, $850 represents a make or break level, near term, for gold longs. Below $850, there’s not much of a point in trying to guess where the next support will be. Take your pick between $720 and $820. The larger uptrend would still be intact at $720. How you proceed should depend on on your time horizon. If you’re not prepared to hold on for months or years, draw a line in the sand at $850 (give it the benefit of the doubt at $840). FYI: I’m not selling because I don’t see our physical gold as a speculative investment. The gold is a strategic hedge against our cash savings.
Presently, the long side on gold is difficult to justify from a technical perspective; except for the most aggressive traders. There are, however, two technical points that might justify a long move here, again, for very aggressive traders only:
The weekly stochastic is around 20. That’s extreme. The price is also hovering just over the strategic $850 support. If $850 holds, and this is a big if, the snap-back higher could be very rewarding for falling knife players. Below $850, though, take your pick between $720 and $820 for a decent support.
The question, of course, is how long the short squeeze on the dollar will last? I have no idea, but until the USDX closes above about 75, I’m not even paying close attention to it. A short squeeze is a game of chicken. For now, I’m not blinking.
I see a full court press with all the clowns in the media saying that the bottom is in on the dollar and the euro crash is coming, etc… The dollar will rise on the wings of eagles and harps will play in the background… The sweet perfume of renewal and optimism will pervade America, from sea to shining sea.
Right?
Look at this from Bloomberg:
Futures traders are betting for the first time since December 2005 that the dollar will gain against the euro.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, known as net shorts, was 21,315 on April 29, compared with net longs of 18,907 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show.
“The dollar has already turned against the euro,” said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. “The dollar will go to $1.52 in a straight line.”
The dollar increased 0.3 percent to $1.5424 per euro at 5 p.m. in New York, from $1.5474 yesterday. It touched $1.5361, the highest level since March 24.
The dollar rose 1.3 percent against the euro this week, its biggest rally since March, and has appreciated 3.6 percent from a record low of $1.6019 reached on April 22. It’s the first time the dollar has posted two weeks of gains since December.
The currency rose after the Federal Reserve cut interest rates on April 30 and said “substantial” easing since September would help foster growth. The Labor Department reported today that U.S. employers eliminated fewer jobs in April than forecast, indicating the labor market is weathering the economic slowdown.
Payrolls shrank by 20,000 last month following a revised decline of 81,000 in March. The median forecast of 82 economists surveyed by Bloomberg News was for a drop of 75,000.
For now, my assessment of the sentiment above is: Don’t drink the KoolAid.
I’m thinking a few months ahead to Summer gas prices in the U.S. While that will be interesting, it might pale in comparison to the real estate situation. The glut of unsold homes will increase even more as people try to unload their upside down McMansions because the loans have reset and they can’t afford the payments anymore. Anyone who thinks the real estate situation is stabilizing in the U.S. must be smoking crack. Watch this interesting Mr. Mortgage piece: Is Now The Right Time To Buy A Home?
In summary, gold has come down sharply and could very well be oversold, however, $850 should hold for that premise to be validated.
I do think that there is “someone” trying to shake gold investors from the trees. I am also not freaking out.
Ya, there are a lot of offers for koolaid.
CD’s pay 3 percent at Mom’s broker. Regular cash savings pay less than 1%. I don’t see any reason to leave gold for that!
When George Bush gets his permanent tax breaks it will be the sign that the U.S. piggie bank has reached its Humpty Dumpty stage. There will be lots of dollars but they will be worth even less what they are now.
Have to say, this correction we are going through currently is brutal!! Having said that, its still not as bad as the one I went through when gold dropped from $730 to $550/oz and silver from $15 to $10.50/oz about 2yrs ago.
It is hard going through these severe corrections but everytime I get nervous and think about selling I think to myself: What do I invest my cash in after precious metals…
I’m staying right where I am 🙂 Gold and Silver. I know it’ll go back up to …? It might take a while but I’m prepared to wait. I’m in it for the long term.
thanks for the info 🙂
If you look at Realtor.com, a lot of the inland cities like Sacramento which had intense speculating bringing prices of ordinary houses above $400,000 now have lots under $150K.
In Las Vegas, they say that the culture contributes to people dumping large houses in the same way some people trade in their car every 5 yrs: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/04/REPG10D4MM.DTL
quintanus:
The best description of Las Vegas I ever heard is that its a place that “presents proof that we are a wicked people who deserve to be punished”. I think that article confirms the truth of that.