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Friday, March 11, 2011

Gold Chart Pattern: another buying opportunity?

Last month, gold’s 2 years price chart was struggling to move above the 30 day SMA after recovering from a drop to 1315 from its earlier peak of 1421. I had suggested buying below 1340, and accumulating on a convincing move above 1356. After consolidating a bit near 1356, gold’s price shot up close to its previous high of 1421, and after a brief pause rose to a new all-time high of 1437.

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Profit booking seems to be the reason why the price has slipped to 1411, just below the rising 14 day SMA. Can it fall some more? Yes, it can. It has already dropped below the triple top at 1421. The next support level is at 1400, from where an upward bounce can be expected.

Is this correction another buying opportunity? Yes, it is. Note that the 200 day SMA continues to rise, and gold’s price is trading much above the long-term moving average. That is the sign of a bull market, and the strategy should be to ‘buy the dips’. Note that the chart pattern is close to two previous peaks. Accumulating in small quantities would be a more prudent approach, rather than buying in bulk.

How long will this bull market in gold continue? Who knows, and why should investors be bothered? There is still a lot of uncertainty all around. Emerging markets are facing inflation pressures, which could lead to a slow down in their economies. The recoveries in the US and Europe have been less than stellar so far. The unrest in North Africa and the Middle East is pushing oil prices higher, which will not at all be conducive to faster economic growth.

Gold seems to be the safest haven of all. Stay invested with a suitable trailing stop-loss, may be at the level of the rising 200 day SMA. That is as close to a ‘sure thing’ as you can get in investing these days.

4 comments:

jawaharlal bansal said...

Dear Subhankar,As usual your chart on Gold is excellent.Can you provide,long term chart of US $/ Indian Rs. for investment purpose.Dr J l Bansal.

Subhankar said...

Thanks, Dr B.

Have never traded forex, so no idea of $/Re chart.

Abhi said...

So you think that the current price of gold - INR 20,885 is a good valuation? I've read at couple of places that the gold is currently at record highs. That makes it a risky investment. The chances of capital loss in the yellow metal are quite high. Please opine.

Subhankar said...

If you read my earlier posts on gold chart pattern, you will find that I'm not a great fan of buying gold.

Gold happens to be in a 10 years long bull market. 5 years ago, it was at a new high of $700. 3 years ago, it was at a record high of $1000. You make money in a bull market by buying the dips. I have also mentioned that the current price is near all-time peaks - so accumulating in small quantities rather than bulk buying would be the smart thing to do.

Maintaining a stop-loss when buying any risky asset helps in reducing losses. If you are not ready to absorb a capital loss, then bank FDs are a safer option.