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Thursday, January 17, 2008

Where is Gold Going Next?

Stocks, including gold stocks and agriculture stocks, sure looked oversold yesterday. That's why I recommended RGS and RCS subs close out bearish hedges (at tidy profits) and add new positions. So what did we get today? Another cliff dive! Ouch.

Today's action tells me that the pullback in gold could continue for a bit. Here's what I'm looking at ...There are many fundamental forces pushing gold higher longer-term – tight supply, soaring demand fueled by investment funds and consumer demand in China and the Middle East, and the declining US dollar just to name some. But in the short-term, the yellow metal is technically weak, and the door is open to a further pullback.

Here’s what the market’s technicals are telling me about the streetTRACKS Gold shares (GLD), an exchange-traded fund that follows the price of gold closely .

On the bottom of the chart is a momentum indicator called MACD. This looks like it is about to give a “sell” signal when the blue line crosses below the red line. This tells us that GLD could have some more downside.

The horizontal lines on this chart are Fibonacci retracements – key support levels that are common in stocks.

  • A 25% retracement of GLD’s big move since August would bring it to 83.69. That also lines up with its high from November.
  • A 50% retracement would bring the GLD to 76.95 – and that lines up with another area of price support.

For the GLD to get to 76.95, gold would have to fall to 769.50, which is about when you’d see gold permabulls curl up in fetal positions and/or crap themselves on CNBC. We probably won’t be lucky enough to see a pullback that far. I’d mark 83.69 as more likely, and a good place to start buying gold or the GLD.

So if we think gold is going lower in the short-term, should you short it? That’s probably not wise. There are too many surprises that could send gold soaring. For example, Ben Bernanke could announce a surprise 50- or 75-basis point rate cut to prop up the economy. It might help the economy, but a rate cut is also A) inflationary and B) bearish for the dollar.

Since the US dollar and gold sit on opposite ends of what I call the “see-saw of pain,” such a move could send gold surging higher.

It’s better to wait for gold to get to those support levels and then go long. Remember to use protective stops – doing otherwise is foolish in such a volatile market


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