After a brief decline in July, gold once again finds itself in the investment spotlight as investors seeking safety from the turbulence of the bottoming 4-year cycle turn to gold. In its latest close, the gold price according to the 100 oz. COMEX index closed at $1,248.50 just below and within reach of its previous high of $1,260.
Crowd sentiment on gold and the gold stocks is obviously running high but I don't get the sense it has reached the dangerously high proportions seen at major tops. The number of articles dedicated to the yellow metal in mainstream news publications has increased in recent weeks. At minimum this is a sign that investors should exercise caution on the near term trend, using the favorable publicity gold garners as a warning to tighten up stop losses on existing long positions.
Some analysts are going so far as to put a "sell" on the yellow metal due its recent surge in popularity. To get a contrarian sell signal we'd have to see outrageous levels of excitement over gold and gold stocks, coupled with a nearly linear or parabolic rise in price. We'd also expect to see something that has accompanied virtually every significant market top in recent years, which is when full color pictures of the lustrous metal are seen adorning the front pages of magazines and newspapers. The closest we've seen to this recently is the August 30 cover of Businessweek, which featured the face of billionaire financier Thomas Kaplan against a gold colored backdrop, headlined "The Gold Digger." The article was in reference to Kaplan's search for gold in Romania. This skirts the edge of the "gold cover" indicator but doesn't quite qualify for it, IMO.
Another close call occurred in last weekend's edition of the Wall Street Journal. On the front page of its finance section was the headline, "As Gold Climbs, So Do the Deals." It was accompanied by a full color picture of the Eureka West vein outcrop at Andean Resources' Cerro Negro gold exploration project. The article was itself a preliminary warning of a market top which is likely forming but I wouldn't call it a deal breaker as far as sending a contrarian sell signal. The article described the trend of the larger gold producers currently on the move in search of attractive junior resource companies to acquire.
Already there have been a couple of high profile deals involving Goldcorp's announcement that it would buy Andean Resources and Kinross Gold's purchase of Red Back Mining. Such deals do tend to occur as a market top approaches but aren't in themselves guarantors of an imminent reversal of trend. What you have to watch for to indicate the top is near is when the penny junior mining stocks start taking off in euphoric 2-3 day rally bursts, many of these rallies for no reason. This tells you that the speculative element has entered the market in full force and that a top beckons.
The single biggest factor behind gold's latest rise isn't speculative fervor or excessive greed - elements commonly seen at the conclusion of a major uptrend. Nor is the motive force a mere seasonal factor. Instead the driving force behind gold's uptrend is the general concern - if not outright fear - over the economic outlook. As Matt Whittaker wrote in a recent Barron's column, "Right now, people want gold because they're uneasy. True, they aren't as scared as they were in June about the European debt crisis, and they are less fearful of systemic collapse than during the financial crisis of 2008. Nowadays, it is a slow, simmering fear of prolonged anemic global economic growth." Gold has been one of the best plays against the turbulence and uncertainty of 2010 and will likely continue to be as long as the employment rate and other key economic numbers remain weak.
Regardless of whether gold is near a top or not, one thing that must be said in its favor is that because of its long-term forward momentum, gold trading is ideally suited for trend line trading. If ever there was a better advertisement for the immediate-term trend line method of trading it would have to be found in the gold price of the last few months. The trend line breakout in early August allowed investors to ride the uptrend from $1,200 all the way up to $1,260 in the last month without any significant volatility along the way. Using trend line breaks for entry and exit signals has been the simplest and most effective way of participating in the interim trading range in gold that has been underway since May.
Silver Trading Techniques
With the precious metals long-term bull market well underway, many independent traders and investors are looking for ways to capitalize on short-term and interim moves in the metals. Realizing that the long-term "buy and hold" approach isn't always the best, many are seeking a more disciplined, technical approach for realizing gains in the market for metals and the PM mining shares.
It's for that reason that I wrote "Silver Trading Techniques" back in 2005. My goal in writing this book was to provide traders with some reliable trading indicators for anticipating and capturing meaningful moves in the price for silver and the silver mining shares. Included in this guide are rules for using the best moving averages when trading silver stocks, how to spot a turnaround in the silver stocks before it happens (best-kept secret!), how to tell when a silver stock has topped and which moving average crossovers work and which don't . Also explained are the best technical indicators for capturing profitable swings in silver and silver stocks and how to apply them.
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