Although it’s been up 11.5% this year, gold has had a distinctively mixed 2008. After reaching a 27-year high on March 17, gold entered into its own "bear market", correcting almost 17%. But after a two-month base-building period, gold has broken out and resumed its uptrend during the past two weeks — just about the same time global stock markets really began to fall out of bed.
So let’s review the reasons — both fundamental and technical — why I think the SPDR Gold Shares (GLD) is a solid, short-term profitable trade even while global stock markets struggle to regain their footing.
First, gold has historically performed strongest during times of global uncertainty and high-investor pessimism. As a rule of thumb, the worse the headlines, the higher the price of gold. Note that gold reached its record high in mid-March — just about the time the Fed bailed out Wall Street investment bank Bear Stearns and global equity markets began a bear market rally.
In addition, inflation is back in the headlines. Six out of the world’s top 10 economies now are suffering from inflation in the double-digit levels. As gold is investors’ #1 hedge against inflation and store of value, rising inflation is always bullish for the yellow metal. The continued weakness of the U.S. dollar also supports the dollar denominated gold price. Throw in increased demand for gold from fast-growing economies like China and India, and the fundamental bullish case for gold could hardly be stronger.
Second, technical analysts also have become excited about the short-term prospects for the price of gold. Unlike equity markets, gold found support at prices above its 200-day moving average in the past few months, and it now is trading sharply above its 50-day moving average.
Chartists point out that gold recently broke above a downward trend line, which was formed by connecting bullion’s peak of $952.60 on April 17 and a high of $935.30 on May 22 — the two recent tops after prices began to slide following a record $1,030.80 on March 17. Gold’s current chart formation also looks reminiscent of its price pattern in 2006, when gold surged to a then 28-year high before correcting. And gold’s recent correction from its March record almost matched exactly gold’s $195 decline from a top in May 2006 to a bottom in October 2006. This confirms that gold’s recent correction was completely normal in the context of a long-term bullish trend.
This all suggests that the technical buy signal for gold was triggered at the $915 mark, when gold surged on heavy volume on June 26. And since last week, gold almost traded through another key resistance point of $935, it might only take a few weeks for gold to test the $1,000 level once again. With gold’s current level still trading at less than half its inflation-adjusted peak of more than $2,000 per ounce, many analysts believe gold could double from current levels — though certainly not without its share of its 15-20% corrections along the way.
So buy the SPDR Gold Shares (GLD) at market today, and set your stop at $81.50. For potentially even bigger profits, buy the December $90.00 calls (GLDLL.X).
PORTFOLIO UPDATE
You were stopped out of the remaining half of Sociedad Quimica y Minera de Chile S.A. (SQM) this past week, recording a 26.44% gain in the stock in less than four weeks — a terrific return in one of the weakest months for global stock markets on record.
Last week we also were stopped out of Potash (POT) for a double-digit 17.26% gain and the Market Vectors Coal ETF (KOL) for a small loss.
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