Late last year I said that the charts were forecasting a rise to $1,300 an ounce
-- a new record high -- and I still think it looks like this rally can continue if we can get another spurt or two
in the price. During the recent run up in prices I urged you to be cautious and that you should limit your investment
in gold and the precious metals to only perhaps 5% of your overall portfolio. The recent selling proved my point about
being cautious. And you should still be cautious. *
Even if there is more profit taking Gold must
stay above the $1,150 "break out price" that I told you to watch for several weeks ago to remain bullish.
As long as gold can hold above $1,150 this newest bull run is intact despite any new profit taking that might develop ahead.
*
Remember some mild profit taking after setting
new record highs is normal and can be expected. If the rally should continue, there might even be some consolidation
at the $1,300 level. Even a raging bull market does not shoot straight up on the charts, and frankly, a market that
does shoot straight up is destined for a giant sell-off so profit taking along the way is what we want to see. You might
call the selling and profit taking elements a "self correcting market" and a self correcting market is very powerful
for long term bulls.
*
THE REVERSE HEAD AND SHOULDERS
FORMATION INDICATES $1,300 AN OUNCE GOLD IS COMING
*
As
you know, I called the start of the new bull market for gold back in 2005 while reporting the noon news on KCAL-TV Channel
9. Gold was then under $500 an ounce. In my forecast made October 20, 2009 I wrote here that the reverse head
and shoulders pattern on the five year price chart indicated to me that gold might run up to $1,300 an ounce.
*
And
this is what had me optimistic a few months ago: The "reverse head and shoulders formation" is a very powerful,
bullish chart formation, that indicates a stock or commodity has fallen to a support price level and has recovered to previous
highs. But when that "reverse head and shoulders formation" has broken out to the upside, it is a clear sign
that much higher prices to come.
*
Look at the five year price chart for gold, and you will find one at www.kitco.com and you will
see the "left shoulder" formed at March 2008 at the $1,000 price level, then the sell-off which was the head to
about $700 in October 2008, which was followed by the recovery back to $1,000 -- the right shoulder -- and now the break out
to well above $1,000. From my interpretation of the chart, the spread of $1,000 to $700 (a $300 move) should now be
made to the upside, which should carry gold from the $1,000 "shoulder line" to the $1,300 level.
*
This same 5-year chart is also showing a cup and handle formation which is also a very powerful chart pattern indicating
strong gains in the future.
*
Clearly, the golden bull is running again.
There are many reasons for this including the weak dollar (gold is priced in dollars), higher oil prices, talk of higher inflation,
and even talk about a return to the gold standard -- but I doubt we will ever return to the gold standard. The recent
drop in oil prices because of the Euro in my opinion is simply temporary.
*
But I still want you to be cautious. Your investment
in gold should be no more than 5% of your portfolio. You should not put all your eggs in one basket, even if they are
golden eggs.
*
WHAT I SAW IN THE GOLD PRICE CHARTS TO PREDICT A NEW BULL RUN
*
It was months ago that I
noted that the gold price on the one year price chart had a large pennant formation that appeared to have its "point"
at the $980 level. And when gold had a break out above $980
and completed the pennant formation, I said there could be a strong rally in the days to come. Well, we had that breakout
and that strong rally.
*
Remember
that gold is priced in dollars, so when the dollar loses value on world money markets, the price of gold goes up. And
when the dollar gains value, gold goes down. Now the dollar is relatively healthy but gold continues to rise and this
is very positive for gold. Now it looks like gold is no longer a dollar hedge.
*
Watch platinum now because it is linked to the
financial assistance package for the auto makers and to the state of the economy. If the financial assistance package does
not "work," and if the economy remains weak, it will hurt auto production and sales and this could severely cut
demand for platinum for catalytic converters. Platinum has been depressed in recent months but platinum is moving higher
now on hopes that auto sales are finally picking up because of the cash for clunkers incentives and a new increase in auto
production and talk that the recession is behind us.
*
WHAT SHOULD YOU DO NOW?
*
If you are interested in buying gold now keep these points
in mind: generally invest not more than 5% of your "investment money" in gold or other hard assets such as
silver. That means for every $100,000 of investment money you have you have only $5,000 to invest in gold and other
hard assets. Buy gold that is easy to sell, and this means government coins-- you could have a problem selling privately
minted gold coins. And don't buy all of your gold investment at once. Pace you're buying because gold prices will
vary and a week from now or a month from now you might be able to buy another ounce of gold at a lower price.
*
For those of you who bought gold three and four years ago at
much lower levels -- when I was recommending the purchase of gold on KCAL-TV in Los Angeles -- you are now enjoying some solid
long term gains. It never hurts to take profits. Remember, no one ever went broke selling at a profit.
*
In my report called "Stock Market Notes" which you will find in the index of this web site,
I talk about an event called slumpflation which is when inflation and recession happen simultaneously. Slumpflation
is a rare event but gold could rally in a slumpflation event because of the inflation factor. In a recession by itself,
the precious metals including gold tend to lose value. But in a slumpflation with strong inflation a gold rally could
come as investors look for an inflation hedge. Gold could very well be that inflation hedge during slumpflation.
The big question is: will inflation return in the face of the current financial crisis and the recessionary threat.
So far, the threat is strictly from recession and not inflation.
