October 8, 2009
Dr. Alexander Elder
www.elder.com
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Gold … Camp ... Education ... Specials
When selecting my topic for the SpikeTrade reunion last weekend, I chose "Gold: My Trading Plan for the New Bull Market." The timing was fortunate – our Reunion ended on Saturday, and Gold exploded on Tuesday, giving everyone a day 'to get with the program.'
Many years ago I've read a book ago called Campaign Trading, whose main concept was not to approach trading as hit and run but as a thought out campaign with multiple entries and exits on many levels. I think that we need to approach gold that way. Before running a trading campaign, you always need to ask yourself whether the trend is in its beginning, middle, or near the end. Let us try to find the answer for Gold.
WKLY CHART
A key feature of the current economic crisis is that the governments around the globe, from Washington to Tokyo, are printing huge amounts of money to get the economy moving again. Gold is an obstacle for them, because its rise serves as a loud negative vote on the government conduct. Central bankers hate gold, call it 'a barbarous relic' but they cannot ignore its price which represents the market's vote.
Historically, gold was money, but in the 20th century the politicians managed to break this link. There is not enough space in this letter to discuss gold history; suffice it to say that today not a single currency in the world is backed by gold.
Gold is rare and virtually indestructible. Almost all gold dug up in history remains in use or storage today, but its worldwide supply is so limited that it would fit into two Olympic-size swimming pools. When the financial system is stable, gold can stay relatively flat trading for decades, but when the markets become distrustful of the governments, gold skyrockets. There are several reasons to believe we are in an early stage of one of such periods.
You can see on this weekly chart how gold has attacked the $1,000 - $1,050 level four times in the past two years and is now in the midst of the fifth attack. This resistance shows that some powerful interests are keeping a lid on gold. Its failure to turn down is very bullish. If gold wanted to turn down, it would have reverse after a single $1,000 top, or a double top, or a triple top. The fact that gold keeps attacking this key resistance level is a sign that the bulls are extremely motivated and strong.
And who could be 'the interests' pushing gold down? There is a widely rumored program whose existence our government keep denying, whereby they lend the use of the country's gold reserves to selected banks. Those banks sell massive amounts of gold short. If they manage to push gold price down, they'll garner fantastic profits while helping their friends, the central bankers. But what if they fail?
And how much gold does the government have available to lend out to shorts? At $1,000/oz, the total value of the US Government's gold supply is just a bit $280 billion. At this day and age, this may be just about enough to rescue a mid-size insurance company – but not to hold back gold bulls (I am grateful to Jock G. in St. Louis, a camper and a friend, for sending me these numbers). If gold decisively penetrates the $1,050 level, those banks will be forced to run for cover, and we will see the mother of all short-covering rallies.
How high is that rally likely to go? The solid green arrows on this chart mark three recent bull markets – they all went up between 47% and 53%. If the current rally follows their example, it can be expected to carry to $1,300.
I think that actual target is much higher. A breakout to a new record high, with massive short-covering adding fuel to the fire, is likely to change the way we see gold. In this new economic and psychological climate it would not be surprising to see gold rise to $1,500 before a meaningful resistance sets in.
DAILY
How should we trade this bullish move? We could do it with futures, gold stocks, or gold ETFs. We need to plan a campaign that includes the rules for multiple entries and profit target, as well as protective stops. This monthly newsletter is not really the best place to discuss an elaborate plan, but let us take a quick look at the daily chart of gold.
The Triple Screen trading system states that when the weekly trend is up we should use the dips on the daily chart for entering long positions. You can see here that even the wildest bull market does not rise in a straight line – it inhales and exhales. The green arrow identifies a bullish divergence, a major buy signal. The green ovals show pullbacks to value – minor buy signals. The red ovals mark overvalued zones where partial profits may be taken.
If you would like to follow up on this discussion, we offer you several options:
· Come to the Traders' Camp on January 16-23, where gold is sure to be a hot topic
· Register for my 4-hour class on trading gold in Las Vegas on Nov 18
· Participate in our webinar next week
· In a week or so my latest presentation will be available in the Traders' Shop at SpikeTrade.com
TRADERS' CAMP with Dr. Alexander Elder & John J. Murphy
January 16-23, in the Dominican Republic
Edited by Rogerdodger, 09 October 2009 - 12:25 AM.
