Reassurance from the technicals

Tuesday, 07 August 2012
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Published in From The CEO

Aficionado that you are, you’ve been diligently following the latest developments about gold while waiting for a positive sign.  You read and listen closely for Fed news because you’re reasonably sure the announcement of a new stimulus package will fuel the yellow metal and begin driving its price to new highs.  You stay on top of news from the European Central Bank because you realize that any orders to start the money presses on behalf of the weaker Euro member nations will represent an aggressive move up for gold. 

You faithfully track central bank purchases of gold, and carefully monitor gold consumer purchases in India.

Still you wonder.  Absent your heeding the readings of a fortune teller, you hunger for another sign.  Is there some other source you can consult?  Is there a way you can feel more confident that now is a good time to add to your gold position?

You’ll be relieved to know the answer is yes.  As is often the case with investments, the trend can be your friend in the gold market.  And a good way to monitor the gold trend is to look for technical signs. In investment technical analysis, it’s a bullish sign when a stock, commodity or index reaches a “double bottom.”  To get a quick sense what is meant by a double bottom, just picture the letter W, with its two lines downward, two bottom points and two lines upward.

Analysts are now looking closely at the HUI Gold Index for a double bottom. The HUI, sometimes called the Gold Bugs Index, is listed on the American Stock Exchange, and is an index of sixteen gold mining companies that are equally weighted and that do not hedge their production beyond 1.5 years.  The index has been a high flier during the current gold bull market, and is considered a significant indicator of uptrends, downtrends and turnarounds in that market.

The HUI bottomed out in May, took a ride up, went down again and appears to be bottoming out at a 400 level during the last few weeks.  While the gold price and gold stocks don’t always follow suit, a bottoming in the HUI can be a positive sign for the yellow metal.  If you hold physical gold instead of mining company stocks, you can monitor the progress of the stocks, but remained less perturbed about these stocks’ fluctuation since it’s the fortunes of gold itself that concerns you.

Meanwhile, gold needs to break a $1,629.00 resistance before it takes off.  You should be aware that Union Bank of Switzerland reports that ETF buying is increasing.  The Swiss Bank reports increased buying activity in Europe as well.  A great deal of attention is now focused on the hundred day moving average at $1,611.94, and UBS analysts estimate that a break above that level will give gold the upward momentum it needs.

All of this – the HUI bottoming, the hundred day moving average, and some increased physical buying in Europe – should give you greater confidence to increase your physical holdings before any conspicuous breakout.  The fall buying season is almost upon us, and you’d best off buying at the current levels rather looking back in regret when gold reaches $1,900 per ounce.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.