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Thursday, May 13, 2010

Gold at a new high - should you buy, sell or hold?

In my previous analysis of the 1 year gold chart pattern, I had mentioned the following possibility:

'The sideways consolidation in a band between 1050 and 1150 has continued for almost 4 months. It would seem we are overdue for an upward breakout soon.'

A look at the longer-term 5 years gold chart pattern had presented a different view - the possibility of a much longer period of consolidation that could include a break below the 200 SMA and support from the previous top.

No such thing happened. Just goes to show that chart patterns don't always repeat. Another reason why reliance on technical analysis alone can prove costly. One has to look at the fundamentals also before deciding on buy-sell decisions.

The sovereign debt problems of Greece (and Spain, Portugal, Italy) caused a lot of uncertainty and loss of euro's exchange value against several currencies. That led to a flight to safety as fund managers and investors made a bee-line for the yellow metal.

Let us now look at the 1 year gold chart pattern

Gold_May2010

The gold chart took support at its previous top at 1050 in Feb '10 after correcting from the top of 1212. It proceeded to make a bullish rounding-bottom pattern from which it smoothly sailed above the 14 day SMA, and the consolidation zone between 1050-1150.

After a brief pullback down towards the 14 day SMA, the gold chart pattern saw a sharp rise past the previous high of 1212. A 3% whipsaw lee-way means the gold chart needs to close above 1250 for the breakout to be technically valid.

That seems just a matter of time. Look at the 200 day SMA. It hasn't been tested even once during the past 12 months, and is showing no signs of slowing its upward momentum.

Existing holders should stay invested with trailing stop-losses. New entrants can wait for a dip towards the previous top of 1212 to buy. But it is advisable to be cautious near 52 week highs.

Bear in mind that gold is unlikely to provide huge investment gains. Note the impressive-looking rise on the gold chart from 980 (May '09) to 1212 (Dec '09). The gain was less than 25%.

The total gain in the past 12 months? A shade under 35%. Not bad at all - but pales in comparison to the gains likely from any decent mid-cap stock. But an investment in gold is definitely less risky.

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