The long-term chart for gold is very interesting for a long-side trade. The Fed is pumping liquidity into the system and trying to put out the subprime brush fire with cheap money. This is clearly inflationary action from the Fed and may help to aggravate the global inflationary pressure that countries such as China are experiencing.
The Asian economies (ex Japan) are growing a massive industrial base, which is consuming the world's commodity resources at a record pace and should continue to create inflationary pressures for the foreseeable future. This is a bullish environment for gold. Considering the inflationary backdrop and the bullish long-term technical formation for gold, we would recommend having some exposure to the group in the coming months.
streetTRACKS Gold ETF
The weekly chart for gold has formed a large bullish consolidation formation. This formation is a large ascending triangle, which is a continuation pattern and suggests that the next move in the metal will be to the upside. Once gold breaks out over $690, we would be looking for another leg higher, which should take gold out to the "measured move" target at $820.
Gold stocks are lagging the broader market by a wide margin, as the consolidation in gold prices has these stocks stuck in neutral. The long-term charts in this group look bullish and should move out to the upside along with the commodity, but we would focus on the commodity itself and make the trade a pure play on gold without the complications of individual company fundamentals.
Traders can buy the
SPDR Gold Shares ETF
as a pure play on the metal. A breakout over $69 in GLD would be an upside resolution to the large consolidation formation and suggests that gold is ready to resume the long-term uptrend.
Gold has two aspects to demand for the metal. The first is the monetary demand as an anti-inflation tool and a "store of value." The second is pure commodity demand for the metal, mostly for jewelry. We would focus on the monetary aspects of the metal in the coming months. The falling dollar and rising-global-inflation picture may finally push gold out of the large consolidation pattern and give it some upside momentum.
At the time of publication, John Hughes and Scott Maragioglio were long streetTRACKS Goldshares. 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.