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Money Will Rotate Into These Dead Investments

Seasoned investors understand that investments which are rocketing to new highs and all over the news will eventually fall out of favor and become a the poor performer, unwanted by market participants.

So it only makes sense that the underperforming investments will some day come back to life and provide opportunity once again. I covered this unique stage analysis in great detail in another report linked below.

If you want to see my forecast and charts I did on June 26th, 2013 pointing to the key investment levels for precious metals and miners which by the way have been dead READ HERE.

Current Stock Market & Commodity Investment Analysis

Two of the weakest investments have been commodities and precious metals since 2011. The Canadian stock market is heavily weighted with these resource stocks and is the reason for its under performance when compared to the SP500.

The time will come when commodities bottom and this will send the Canadian stock market back to the 2014 highs or better.

Take a look at the chart below. You will see the SP500, gold miner index, Canadian market, and the commodity index. What you notice see is that the US stock market has been the hot investment of choice, while commodities and precious metals have been falling for years.

No one is excited about investing in commodities or precious metals, and it makes sense. Anyone holding these investments has had a terrible couple of years and lost most of their capital. The last thing they want to do is buy more.

The good news is that this mind set eventually creates huge opportunities for the savvy, patient, investor like you and I. The hardest part is waiting for the psychology of investors to be completely out of favor, and only then can an investment bottom. This often takes years, and it has been for resources.

Gold Trading Newsletter

The 2007-2008 Resource Double Top and Drop & Gold Forecast

Bull market tops take months 6-12 months to form before price truly rolls over and starts a bear market. Most traders and investor try to pick tops but because this process is so painfully long, most get shaken out or give up well before the top has completed it’s topping phase.

What I am interested in is the Canadian index and resource type plays. The US stock market looks and feels as though it’s trying to form a topping phase but it is at best 6-12 months away from being a confirmed bear market.

Until then, I feel the US stock market will struggle and the focus should be put on investments that come to life during this stage of the stock market and economic life cycle.

Precious Metals Trading Newsletter

The Dead Always Come Back To Life for One More Rally

In short, I feel resources and the Canadian stock market will become strong areas of the market going forward several months. There are a few ways to play this, and timing will be crucial. My gold forecast I gave to subscribers today for short term trading looks like it could be a 25% mover.

You can follow my coattails as I trade at www.TheGoldAndOilGuy.com

Chris Vermeulen

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Gold Forecast & How To Momentum Trade Gold Stocks

Gold Forecast PredictionBack on April 9th I posted a short tutorial on how to momentum trade gold along with my short term gold forecast.

Today I wanted to do a follow up video for my gold market traders for three reasons:

1. I had lots of great feedback from traders taking advantage of what I showed to profit in the past week.

2. To show you how and why this strategy works better with gold stocks and silver stocks.

3. To provide my short term gold forecast so you are on the right side of the market for next week.

4. Also you should see my major long term Gold Forecast

Get My Gold Forecast & Gold Trade Alerts: www.TheGoldAndOilGuy.com

Chris Vermeulen

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How to Trade Gold – Gold ETF Trading Newsletter

I did a short video a while back on momentum trading gold and wanted to share it and post it in the members area of the website for you to view. It’s short and basic, but useful.

Current snap shot of gold trend…

Gold - ETF Trading Newsletter

 

Learn More & Trade With My Alerts with my ETF Trading Newsletter

Chris Vermeulen

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Is February a Risk-On or Risk-Off Trade: Equities or Gold & Bonds

Recent price action in the stock market has many traders on edge. With the market closing below our key support trend line last week, the market has now technically starting a down trend.

While trend lines are a great tool for identifying a weakening trend and reversals in the market, I do not put a lot of my analysis weighting on them.

Most of my timing and trading is based around what I call INNER-Market Analysis (Market Stages, Cycles, Momentum and Sentiment). Using these data we can diagnose the overall health of the market. Knowing the strength of the market we can then forecast short term trend reversals before they happen with a high degree of accuracy.

In this report I keep things clean and simple using just trend lines. During the last three weeks we have seen the price of stocks pullback. And because 2013 was such a strong year for stocks most participants are expecting a sharp market correction to take place anytime now.

So with the recent price correction fear is starting to enter the market and money is rotating out of stocks and into the Risk-Off assets like gold and bonds.

Stocks tend to fall in times of economic uncertainty or fear. These same factors push investors towards the safety trades (Risk-Off) high quality bonds and precious metals. As more money goes from risk-on to risk-off, stocks will continue to fall and the safety trades will rise. The move by investors to select the safety of gold and bonds compared to the volatility of stocks will result in these risk plays to moving in opposite directions.

Let’s take a look at the chart below for a visual of what looks to be unfolding…

Gold Trading Newsletter

How to Trade These Markets:

While these markets look to be starting to reverse trends, it is critical that we understand how the market moves during reversals and understand position/money management.

Getting short stocks and long precious metals in the long run could work out very well, but if you understand the price action that typically happens during reversals you know that the stock market will become choppy and we could see the recent highs tested or possibly even a new high made before price actually starts a down trend. And the opposite situation for gold and bonds. Drawdowns can be huge when investing and why I don’t just change position directions when the first sign of a trend change shows up on the chart.

Price reversals are a process, not an event. So it is important to follow along using a short term time frame like the daily chart and play the intermediate trends that last 4-12 weeks in length. By doing this, you are trading in the direction of the most active cycle in the stock market and positioned properly as new a trend starts.

 

What I am looking for in the next week or two:

1. Stocks to trade sideways or drift higher for 3-6 days, then I will be looking to get short. Again, cycle, sentiment, and momentum analysis must remain down for me to short the market. If they turn back up I will remain in cash until a setup for another short or long entry forms.

2. Gold remains in a down trend but is starting to breakout to the upside. I do have concerns with the daily chart patterns for both gold and silver, so next week will be critical for them. We will be using some ETF Trading Strategies to take advantage of these moves.

3. Bond prices (not yields) look to be forming a bottom “W” pattern. They have had a big run in the last few weeks and are now testing resistance. I think a long bond position is slowly starting to unfold but if we look at the futures price charts for both bonds and gold, they have not yet broken to the upside and have more work to do. As mentioned before ETFs are not really the best tool for charting but I show them because they what the masses follow and trade.

Get these reports every week free at: www.GoldAndOilGuy.com

Chris Vermeulen
Author of “Technical Trading Mastery – 7 Steps To Win With Logic










 

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Precious Metals & Miners Flash Short-Sell Signal

It has been a bumpy ride for precious metal investors over the past couple of years and it unfortunately I do not think its over just yet.

The good news is that the bottom has likely been put in for gold, silver and gold miners BUT the recent rally in these metals and miner looks to be coming to an end. While we could see another pop in price over the next week or so the price, volume and momentum see to be stalling out.

What does this mean? It means we should expect short term weakness and lower prices over the next month or two.

Below are three charts I posted several months ago on my free stockcharts list. These forecast were based off simple technical analysis using cycles, Fibonacci and price patterns. As you can see we are not trading at my key pivot level which I expect selling pressure to start to increase and eventually overpower the buyers sending the prices lower.

 

Gold Trading Weekly Chart:

Here you can see that gold is technically in a bear market when viewing it on the weekly chart. If you were to pull up a daily chart you would likely notice how the price of gold is trading at a key resistance level on the chart and has reached its full flag measured move.

What does this mean? It means the odds are pointing to lower prices for gold in the next few weeks. Keep in mind though I do feel as though a major bottom has been put in place for the precious metals sector. So buyers are likely to step back in around the $1300 area.

goldoverbought

 

Silver Trading Weekly Chart:

Silver has a little bit different looking chart but the same analysis applies here as it did in gold.

silveroverbought

 

Gold Miners Trading Monthly Chart:

Gold miners may have bottomed on this monthly investing timeframe chart but the daily chart which you will see next clearly shows short term weakness has started.

GDXLongtermBottom

 

Gold Miners Trading Daily Chart:

This daily chart really shows my thinking for miners and the overall precious metals sector as a whole. The recent weakness in gold miners to the down side point to distribution of shares. This is very negative for the price of physical gold and silver as gold mining stocks tend to lead physical metals.

The yellow box shows a possible major stage 1 basing pattern forming. If this is the case, then we will have a great opportunity in the coming months when the precious metals down trend completes a reversal and start heading higher.

gdxoverbought

 

How to Trade Precious Metals & Gold Miners Conclusion:

In short, I think that staying in cash or shorting metals is the play for the next couple weeks. After that anything can happen and until price breaks down or finally completes the basing pattern and confirms a market bottom I would be very cautious trading here.

In the last week members of my trading newsletter took profits on our short SP500 trade and we closed a long trade in natural gas for a quick 6.5% gain. Join our community of traders and have your money on the right side of the market!

Chris Vermeulen
www.GoldAndOilGuy.com

 

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Chris Vermeulen Tells You How To Become a Full Time Trader – Interview by: FuturesPortal.com

By Futures Portal

Chris Vermeulen www.TheGoldAndOilGuy.com a full time trader shares
his experience of trading futures and ETFs.
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You call yourself the “Gold and Oil Guy”, are the gold and oil sectors are your specialties?

I follow gold and oil closely and give my analysis, thoughts and trades ideas to my followers each morning before the market opens. While I follow them closely the SP500 is my baby and what I prefer to trade. I found that emotions run wild in the stock market and once you understand what state of mind the majority of traders are in, then you are able to accurately track and forecast future moves 1-3 days in advance.

How did you get started trading?

I started years ago in college trading from my laptop. It didn’t take long before I decided this was what I was meant to do for a living. I have never stopped since. I work with several financial websites and professional traders each week and trade each day either managing swing trades or taking a day trades.

What instruments do you trade the most?

Depending on the risk and type of trade (swing, momentum or day trade) I jump between trading ES Mini Futures, 1x ETFs, 2x ETFs and 3X ETFs. I prefer index trading specifically the SP500 as that has been my main focus for day one. It’s better to be really GOOD AT ONE THING than average at a bunch of things. This strategy has many benefits to it including less time searching for trade setups, less stress, lower risk levels etc…

How did you choose the time frames you trade on?

Choosing the time frames to trade took many years of trial and error. But I did eventually find a couple time frames which have proved to be VERY accurate when trading the SP500 specifically. Money flows in and out of the market in waves (cycles) and once I realized these cycles and could identify fear and greed in the market place finding and timing trades was the difference between night and day.
The really exciting thing about the SP500 and its cycles/timeframes is that I can trade full time and have trades almost every other day or site back and wait for the longer term swing trades and enjoy time with my family, friends and exercise. I have built a trading system that automatically breaths with the market using current volatility levels, various cycles, buy/sell volume levels and momentum and it alerts me in pre-market trading each day if I a buy, sell or position adjustment is to be made. The time frames I focus on are the daily, 30 minute, 10 minute and 3 minute.

Do you trade leveraged instruments? Do you trade them differently from non-leveraged investments?

I trade all types of instruments based around the SP500. In short, the more leverage I use the smaller the position I take and the shorter term the trade is.

For example I will trade the ES mini futures for day trades which are always closed out at the end of the day.

Momentum trades which last 1-3 days I will use a 2x or 3x ETF like SSO or SPXU to get more juice from a play but maintain a healthy risk level as overnight trading and price gaps cut both ways.

Swing Trades I take the largest positions in up to 50% of my trading account in a single position using a 1x ETF like the SPY. These trades can last up to 4 months at times.

I do at times make things a little more complicated when trading with a strong trend. Sometimes when I get a swing trade buy signal I will buy a position using the 1x ETF. If in the next 3 days I get lower prices of more than 1% against me while the uptrend remains alive I will add more of a position using a 2x and 3x ETF also. Once the market bounces back a little I close out the leveraged positions to a quick gain and continue to ride the swing trade. I do this same thing in down trends when I am on a hot streak and in the zone with the SP500.

What has been your biggest hurdle becoming a full time trader?

The toughest part of trading for me is keeping laser-beam focus on my strategy as it is mandatory for success. I work with, talk to and read a lot of market opinions of other traders each day and it can cloud my judgment causing me to break my own rules.

In your opinion, what do most traders don’t realize about the “game” of trading?

Most traders/investors do not understand risk/reward for positions. I would say 90% of people I talk with take much too large of positions in investments which carry very high risk. Also they do not use protective stops based of technical analysis/risk tolerances. Those are the two main things, but this list could go on and on… There are a lot of moving parts in the market and each must be closely monitored, managed and understood clearly.

Again, It’s better to be really GOOD AT ONE THING than average at a bunch of things meaning you should be jumping around trading random stocks, sectors, commodities and investment types like options, equities, forex etc… Just learn one, master it and then expand.

Without revealing your proprietary method, could you please tell us what tools you use for trading? Any specific indicators?

I am a technical trader so I focus 100% on Price, Volume and Momentum. News, economic data and rumors mean absolutely nothing to me. The only thing that pays traders is price action so that is what I follow. It’s simple supply and demand. High volume means there is power behind a move and momentum is how fast the price is moving on various time frames.

As long as you trade with the daily trend direction forget about picking market tops or bottoms you instantly have the odds in your favor. Problem is people always want to try and outsmart the market by going against the trend and trying to pick these tops and bottoms.
As for the indicators I use. Again they are simple and based off price, volume and momentum. Each of my indicators has been customized for the SP500 and is unique. I do like stochastics and bollingerbands but they each need to be tuned for the underlying investment to provide a trading edge.

What advice would you give new traders to start on the right foot?

I would tell a new trader to spend a lot of time thinking about what their ideal/dream lifestyle would be like if they could choose. Do you want to be looking at the computer and trading every day? Or do you want to always be in positions and actively managing them on a weekly basis so you can enjoy life little more? Or A mix of both?

Then you need to figure out what you would like to trade. Stocks, Options, ETFs, Futures, or currencies?
Once you know these things then you should spend a lot of time looking for a successful trading doing EXACTLY what you want and do everything in your power and never give up to learn, master and live that lifestyle. Learning to trade is not cheap. You either lose a lot of money or spend a lot of money to fast track things… either way it’s going to cost you thousands of dollars.

Personally I do a hybrid with laser-beam focus. I focus on only one investment (SP500). And I have learned and created my own trading system so I can day trade, momentum trade and swing it. This give me total freedom as I can spend 20 minutes a day looking at the market to manage my swing trade if needed and then walk away. Or can be replying to emails and see a setup unfolding on the intraday chart and take a quick trade and pocket a few hundred bucks on a day trade.

Final question is about drawdowns. How do you handle them in your trading?

Drawdowns are simple really… Depending on the type of investment you are trading the percentage amount will vary. But the same rule should apply. You should have a maximum loss per trade set so that you never blow your account up. Hopefully your protective stop is set way before that level is ever reached but sometimes price moves beyond normal volatility levels.

My general rule is to never lose more than 1% of my account in a trade. So once I spot a setup and then calculate where my stop should be and figure out how much capital to put to work so that if my stop is hit I do not lose more than 1% of my trading account. Because I focus on the SP500 the volatility is low compared to trading individual stocks so moves in price as easy to digest and reduces fear/stress when in a position.

Chris, thank you very much for sharing your experience with us and our readers.
Best of luck on everything.

FuturesPortal.com Editorial

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Gold, Silver and Miners Remain Junk Grade Investments

Since silver and gold topped in 2011 investors have been struggling with these positions hoping this cyclical bull market for metals continues. The simple truth is no one knows for sure if prices will continue and make new highs and those who say its a for sure thing we all know deep down is full of bull crap.

All investments move in cycles, waves or trends which ever you want to call it. The market has 4 simple yet distinct stages each require a completely different skill set and trading tactics to navigate.

Stage 1 – After a period of decline a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate the stock.

Stage 2 – Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows. A bull market begins and the path of least resistance is higher. Traders should aggressively trade the long side, taking advantage of any pullback or dips in the stock’s price.

Stage 3 – After a prolonged increase in share price the buyers now become exhausted and the sellers again move in. This period of consolidation and distribution produces neutral price action and precedes a decline in the stock’s price.

Stage 4 – When the lows of Stage 3 are breached a stock enters a decline as sellers overwhelm buyers. A pattern of lower highs and lower lows emerges as a stock enters a bear market. A well-positioned trader would be aggressively trading the short side and taking advantage of the often quick declines in the stock’s price. More times than not all of stage 2 gains are given back in a short period of time. I do show some of my trade setups using these exact stages free here: https://stockcharts.com/public/1992897

Stages

Now that you know the stages and what it looks like its time to review the gold, silver and miners charts.

 

Gold Chart – Weekly

Gold has been in a bull market for several years but is starting to show its age in terms of the size of the price patterns, volume levels and extreme bullish sentiment. Back in 2011 a week before price topped we exited precious metals because the short term charts and volume levels were warning of a sharp drop. Since then I have not done many trades in either gold or silver because I do not like shorting in bull markets. Waiting for a bullish setup/price pattern before getting involved is my focus.

Gold has pulled back with a bullish 5 wave correction the last 5 months and at key support. While the long term charts are pointing to higher gold prices you must be aware that if gold and silver start to breakdown things will likely get ugly quickly. To be honest I do not care which way it goes, I just want it to either rally from support here and make new highs or breakdown and crash. Both will be very profitable if traded properly.

Gold

 

Silver Chart – Weekly

Silver has a very similar chart to that of its big sister (yellow gold).  This shiny metal has the energy of a 3 year old making it a very volatile investment. I have touched on the topic of gold and silver being so called safe havens and if you have been reading my work for a while you know that any investment that can move 18-45% in value within 1 month is NOT a safe haven.

While it has done well in the past decade and boosted a lot of retirement accounts the day will come with these things collapse and most people holding them will give back most if not all the gains they had simply because people get attached to large positions and most do not know when to just exit a position.

Silver

 

Gold Miners Chart – Monthly

This chart gives me cold sweats because I know how many people own gold mining stocks and I know how fast these things can move. If the price closed below the green support line the bottom could fall out and be very painful for those who get paralyzed by denial and do nothing but watch their accounts lose value week after week.

Miners

 

Precious Metals Investing Conclusion:

In short, this report is to show you the very basics of how investments move in stages. It is also to show a warning that precious metals are technically very close to a major breakdown which the big money players are watching closely. This thinly traded sector can move extremely fast when everyone rushes for the door.

Do not get me wrong, I am not saying a crash is about to happen, actually it’s the opposite. All I am doing is planning the idea in your subconscious so that if prices continue to move lower you will remember that these price levels and take action with your investments. Remember, you can always buy the investment back at any time again if the outlook changes in a week, month or year.

Get My FREE Weekly Gold, Silver and Mining Reports and Trade with the Stages: www.GoldAndOilGuy.com

Chris Vermeulen

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Gold and Silver Nearing MAJOR Long Term Support

Gold and silver along with their related miners have been under a lot of selling pressure the last few months. Prices have fallen far enough to make most traders and investors start to panic and close out their long term positions which is a bullish signal in my opinion.

My trading tactic for both swing trading and day trading thrive on entering and exiting positions when panic trading hits an investment. General rule of thumb is to buy when others are extremely fearful and cannot hold on to a losing position any longer. When they are selling I am usually slowly accumulating a long position.

Looking at the charts below of gold and silver you can see the strong selling over the past two weeks. When you get drops this sharp investors tend to focus on their account statements watching the value drop at an accelerated rate to the point where they ignore the charts and just liquidate everything they have to preserve their capital. A few weeks ago I posted my outlook on precious metals which seems to be unfolding as expected: http://www.thegoldandoilguy.com/precious-metals-miners-making-waves-and-new-trends/

Gold Bullion Weekly Chart:

The price and outlook of gold has not really changed much in the past year. It remains in a major bull market and has been taking a breather, nothing more. Stepping back and reviewing the weekly chart it’s clear that gold is nearing long term support. With panic selling hitting the gold market and long term support only $20 – $30 dollars away this investment starts to look really tasty.

But if price breaks below the $1540 level and closed down there on a weekly basis then all bets are off as this would trigger a wave of selling that would make the recent selling look insignificant. And the uptrend in gold would now be over.

Gold1

 

Silver Bullion Weekly Chart:

Silver price is in the same boat as its big sister (Yellow Gold). Only difference is that silver has larger price swings of 2-3x more than gold. This is what attracts more traders and investors but unfortunately the masses do not know how to manage leveraged investments like this and end up losing their shirts.

A breakdown below the $26.11 price would likely trigger a sharp drop back down to the $17.50 level so be careful…

Silver2

 

Gold Mining Stocks – Monthly Chart:

If you wanna see a scary chart then look at what could happen or is happening to gold miner stocks. This very could be happening as we speak and why I have been pounding the table for months no to get long gold, silver or miners until we see complete panic selling or a bullish basing pattern form on the charts. We have not seen either of these things take place although panic selling is slowly ramping up this week.

There will be some very frustrated gold bugs if they take another 33% hair cut in value… You can view some of my trading charts, setups and analysis free at my stockcharts.com list. Be sure to vote for me chartlist each day so I know its of value: https://stockcharts.com/public/1992897

GoldMiners3

 

Precious Metals Trend and Trading Conclusion:

In short, the precious metal sector remains in a cyclical bull market. That being said and looking at the daily charts the prices have been consolidating and are in a down trend currently. Until we see some type of bottoming pattern or price action form it is best to sit on the side lines and watch the emotional traders get caught up and do the wrong thing.

The next two weeks will be crucial for gold, silver and miner stocks. If metals cannot find support and close below the key support levels things could get really ugly fast. If you would like to receive my daily analysis and know what I am trading then check out my newsletter at: www.TheGoldAndOilGuy.com

Chris Vermeulen

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Precious Metals & Miners Making Waves and New Trends

The precious metals sector has been dormant since both gold and silver topped in 2011. But the long term bull market remains intact. As long as we do not have the price of gold close below the lower yellow box on the monthly chart then technical speaking precious metals should continue much higher.

Large consolidation periods (yellow boxes) provide investors with great insight for investments looking forward 6-18 months upon a breakout in either direction (up or down). The issue with investing during these times is the passage of time. One can hold a position for months and sometimes years having their investments fluctuate adding extra stress to their life when they really do not need to.

Once a breakout takes place a powerful rally or decline will start putting an investors’ money to work within days of committing to that particular investment compared to money invested waiting months for the breakout and new capital gains to occur.

Gold Price Chart – Monthly

Gold Monthly Price Chart

 

Gold Price Chart – Daily

The chart of gold continues to form a large bull flag pattern with a potential 3 or 5 wave correction. If price reverses this week and breaks above the upper resistance trend line then it will be a 3 (ABC) wave correction which is very bullish. But there is potential for a full 5 wave correction which is still bullish, but it just means we have another month or two before metals bottom.

Gold Futures Trading Daily Chart

 

Gold Miner Stocks – GDX ETF Chart – Daily

Gold miners do not have the sexiest looking chart. It was formed a strong looking bull flag but has continues to correct and is not nearing a key support level. This level could act as a triple bottom (bullish) or if price breaks below then it would be breaking then neckline of a massive head and shoulders pattern which points to 50% decline. I remain bullish with the longer term gold trend until proven wrong.

GDX - Gold Miner ETF Trading

 

Silver Price Chart – Daily

Silver remains in a long term bull market much like the monthly chart of gold shown earlier in this report. Silver continues to work its way through a large bull flag pattern with a positive outlook at this time.

Silver Price Chart Daily

 

Silver Miner Stocks – SIL ETF – Daily Chart

Reviewing the precious metals sector it seems that silver miners have the sexiest looking chart. All price patterns are showing strength and are in proportion to one other. If this chart plays out to what technical analysis is pointing to then we could see the precious metals sector put in a bottom and rally within the next week or two. And if this is the case then silver miner stocks should provide the most opportunity going forward. Keep in mind you can view my actual watchlist of stock and ETFs I trade in real-time with my analysis free: https://stockcharts.com/public/1992897

SIL - Silver Miner ETF Trading

 

Precious Metals Trading Conclusion:

In short, what you need to focus on is the yellow consolidation box on the monthly gold chart. A breaking in either direction will trigger a massive move that should last 6-18 months. Until then long term investors can simply sit back and watch the sector while they put their money to work in other active sectors.

From a short term traders point of view, that f mine. I am looking for a signs of a bottom on the daily chart to get my money working earlier to play the bounce/rally that takes place and actively managing the position until a breakout occurs. The charts overall are not that clear as to when a breakout will take place. Metals could start to rally next week or in a few months and all we can do is wait for a reversal to the upside before we get active.

Knowing the big picture trends and patterns at play along with major support and resistance levels (breakout levels) is crucial for success and piece of mind.

Get my analysis, daily updates and trade alerts each day at www.TheGoldAndOilGuy.com

Chris Vermeulen

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Gold-US Dollar Link in Question & Technical Setup

The $1800 per ounce level continues to be a major technical resistance area for gold. After hovering near $1800 recently, gold moved sharply away from that level last week to close at $1735 an ounce.

Despite that, more fund managers and analysts continue to point to a bright long-term future for gold prices. John Hathaway of the Tocqueville Gold Fund says gold will reach new highs within a year. He based his forecast, like many others, on the fact that negative real interest rates look likely to persist as Ben Bernanke and the Federal Reserve continue to print money.

Believe it or not, some mainstream analysts are also touting gold’s potential. Merrill Lynch analysts point to the correlation (discussed in a previous article) between the price of gold and the expansion of the Federal Reserve’s balance sheet since the start of QE1 in early 2009.

Based on the current path of the Fed’s balance sheet expansion, Merrill Lynch came up with two longer-term targets for the price of gold. They project gold to hit $2,000 an ounce next summer and to hit $2,400 an ounce by the end of 2014.

Another way to look at gold and the Fed is the so-called gold coverage ratio. That is the amount of gold on deposit at the Federal Reserve versus the total money supply. According to Guggenheim Partners, the gold coverage ratio is at an all-time low of 17%. The historical average is about 40%, meaning that gold would to more than double to reach the average.

Looking at the Fed’s balance sheet is a new and interesting way to look at and forecast gold prices. In the past, the conventional wisdom was that gold was merely an anti-dollar play: U.S. dollar down, gold up and vice versa. But that seems to be changing…..

Reuters had some interesting data. The value of the U.S. dollar net short position fell to $6.43 billion for the week ended October 9. This is substantially down from the previous week’s net short position of $16.3 billion. At the same time, the “managed money” net long gold position in gold futures rose to its highest level since August 2011. That was the time when gold hit its record high of $1,920 an ounce.

So much for conventional wisdom. Both currency and gold traders are seeing this long-term relationship between gold and the U.S. dollar breaking down into a “new normal” of direct central bank intervention into financial markets. Gold seems increasingly to be turning into more of a safe haven play than an anti-dollar one. It seems that more investors are worried about all fiat currencies that are burdened by huge debt loads.

 

The Technical Take…

Below is a daily chart of gold futures. Looking at the price levels and analysis you can see that a bounce or bottom could form at any time now. Price of gold has pulled back in a mini five wave correction touching both our first Fibonacci retracement level of 38% and the 50 day simple moving average. This is the type of pullback that longer term investors like to add to their long gold position. While gold does have the potential to fall all the way down to $1625, in the long run it should continue to rise for the long term investor.

From a trader point of view, it may be worth a stab to get long gold with a very tight stop, but until we see a real panic selling day in gold where volume is high I don’t think the final bottom is in yet.

Spot Gold Bullion Investing

Chris Vermeulen