Gold Is the Ticket

It's the perfect time of the year to think of silver and gold. Every time I hear those two words together, I am reminded of the song from "Rudolph the Red-Nosed Reindeer" sung by Burl Ives. Of course, Burl Ives is referring to Christmas decorations, while we are referring to the commodities.

Like the industrial metals, the precious metals have had a strong run of late. The strength has been supported by monetary conditions as well as outright demand.

Fundamentally, this is an emerging-market play. We can break that down to other sub-themes, but they will all point back to the macro theme of strength in emerging markets -- the dollar has been weakening as emerging markets' growth continues. The negative correlation between gold and the dollar has simply been pushing the price higher as the dollar weakens.

Outright demand is another factor. More disposable income for the largest populations in the world will prompt a desire for the finer things in life, like jewelry. Then there is the good old inflation and risk hedge. There is still a lot of turmoil in the world, whether geopolitical or financial, which has also been seen in the credit markets.

When people get worried, they buy hard assets, and gold is at the top of the list. These underlying supportive themes have not changed, and there is little evidence that they will any time soon.

From a technical standpoint, precious metals are interesting for their strong tendency to trend. Gold has been in a multiyear uptrend. This move has been relatively orderly, and there have been longer periods of consolidation through the rise that have provided a base for the next leg up. Some of these consolidations have lasted six to nine months, casting doubt on gold's ability to continue its rise. As the expression goes, good things come to those who wait.

streetTRACKS Gold ETF

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The ensuing rallies after each consolidation have been very rewarding, and none of the declines have violated the primary uptrend. After a large run that began in August, just as the credit issues surfaced, the price of gold has entered another one of these consolidation periods. Since the high in November, the price of gold has been trading in a range between $775 and $820. This healthy price action is suggestive of gold setting up for another move higher.

Based on this new trading range, we would expect gold to have a minimum move to $875 after the $820 level is taken out on the upside. The volume has been cooperating as well, as it has been drying up during the consolidation as a sign of weak selling pressure. The key short-term support is found in the $760-$775 area, and we would like to see this level hold. A break of that, and there is further risk to the $700 level.

The current bullish setup suggest using this weakness as an opportunity to get long and use the $770 level as a stop on those positions for a move up to the $875 level.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.