Gold Breaks Above a Major Trendline

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau

NEW YORK (ETF Digest) -- With the Central Bank of the United States, better known as the Federal Reserve, making its announcement to keep interest rates low through 2014, gold is going to get some attention. Many people believe gold is a risky investment if interest rates start to rise, since the metal pays no dividends. In that school of thought, Wednesday's actions by the Fed should be seen as bullish for fundamental reasons.

The way I look at it, anything that pays a dividend or makes an interest payment has risk. Some of those risks are reinvestment risk, default risk and purchasing power risk. In my opinion, the fundamental reasons for owning gold these days should be for preserving wealth. It should be looked at as insurance against a financial meltdown caused by excessive credit creation and not enough real assets to back up all of the worlds' current paper debts.

On top of that there's a terrible history for the value of fiat currencies over time. Gold is savings. Gold is money. These are arguments for another day. In the meantime, the current gold futures contract has broken out of a multipoint downward sloping trendline. Any trendline that is greater than three points of contact is significant. Gold also closed above $1,700.

Large round numbers have historically been significant areas of support and resistance. Why is that? In the example of resistance, if you are looking for a reason to sell something that has gone down in value; such as having bought gold above $1,700 a month or two ago, and you saw it drop down into the $1,500's, the feeling can be "if it ever gets back to $1,700 I am selling out."

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It takes strong demand to get through that supply when the time comes. I imagine gold will have a tough time getting through the next couple of round numbers. You can see on the chart below, how $1,900 was a strong level of resistance in August and September of 2011: $1900.4 was the highest close on the COMEX.