Buy gold here?

samsonA client recently asked me if gold was a buy here or not, and she didn’t like my reply. I said, “What’s your plan?”

She said, “I didn’t ask you about a plan, I asked about…”

“I know what you asked. And I ask you if you have a plan,” I replied.

She scratched her head, and I explained…

See, whether gold is a buy here or not depends on how you’re viewing gold. Are you looking to trade it for a quick profit or are you looking to own it as a security, insurance, and a hedge against inflation? The answer to this question depends on your goals, and your overall plan.

Before I discuss whether gold is a buy here or not, let’s take a look at our customary view of the overall market. Here’s the S+P 500:

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That pullback to the 1800 area was something I predicted in this article two weeks ago, and as I hoped, it bounced right back again. I usually draw diagonal lines to show the uptrend the market is in, but this time I drew these horizontal lines that demonstrate the ascending ‘staircase’. Nothing random about those lines, it’s a classic advance. As you can see, S+P is bouncing around in the 1800 to 1850 ‘box’. A break above 1850 should be seen as a bullish sign, but a break below 1770 is a bearish one, but all the time we’re in the middle, no worries.

Okay, so on to gold. If you’re looking to physically own gold as financial security, sure, buy now. Or buy next month. See, if you’re taking a long-term view, this could be a good time to buy, give or take $1-200.

But if you’re trying to trade gold, “give or take $1-200” will cost you dear- you need to be a lot more accurate! So let’s look at the long-term chart of gold. The red and blue curved lines are the 200 day and 50 day average prices.

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As you can see, the brutal downtrend that began around a year ago has leveled off, but it’s still below both the critical moving averages (red and blue lines). But there may be hope in sight…

I drew a line on that chart that could be the forming of a double bottom, one of the most classic signals that we’re at, well, the bottom. And the bigger the pattern, the more powerful the upside if/when it occurs. It doesn’t get bigger than this- that double bottom formed over the course of a whole year!

But the pattern isn’t complete until the right side of the ‘W’ is complete. So I really need gold to pull up to $135 (conveniently also above the 50 day average price line) before I would trade this. But would I buy physical gold as insurance at these prices? Sure, it’s like buying a house- you can afford to roll with the punches. And unless you’re looking at gold or gold-oriented stocks as a long-term lock away, rolling with the punches is something you may still need to be prepared for if you trade gold here.

Best,

Jim.

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