Is Gold A Bubble About To Pop? These Charts Say No

AOL Finance ^ | January 12, 2011 | Charles Hugh Smith

[danielmryan]

This is an interesting moment in the gold market. On the one hand, Goldman Sachs has raised its one-year target for gold to $1,650 an ounce, about $275 higher than the recent price of $1,375. Other analysts, though, believe gold is tracing out a classic speculative bubble, much like real estate did in from 2002 through 2007.

The proper starting point for technical analysis is agnosticism: Don't place any faith in either "story," but instead look to charts of price and other indicators for evidence one way or the other. It's remarkably easy to find evidence for a position you've already taken, but this "confirmation bias" can prevent you from taking advantage of technical analysis's potential to aid in making investment decisionss.

Let's start with a one-year chart of SPDR Gold (GLD), a gold exchange-traded fund (ETF) that's commonly used as a proxy for gold.



What we notice first is that gold -- at least over the past year -- has tended to advance in 3-month bursts, meander in a multi-peak topping pattern for several months, and then decline for a month or so to support levels. Then, it has resumed its long-term trend higher.

Rather than providing evidence of an expanding bubble, this chart suggests a healthy uptrend that has been repeatedly tested as it drops back to its support levels. Each time those levels held, then gold began another leg up. When the price of GLD dipped below the 50-day moving average, that signaled near-term weakness -- a slump that is further confirmed by a break in the trendline....

[danielmryan]

The rest of the article makes the same point about gold over the last five years. There may well be a blow-off top coming, but we ain't there yet.

It's an interesting use of chart analysis: not to guess at what gold'll be, but what its past pattern shows about it now.

[albie]

Printing money, debt ceiling about to be surpassed yet again, a credit rating decrease. Yeah...sure. The gold bubble is about to pop. All bets are off when it comes to “charts”. These “charts” never had to deal with the insanity we’re dealing with right now.

[stefanbatory]

Do any of these investment pros who write these articles know about the basic 20/10/10 rule?

[DesertRhino]

The Chinese are hoarding gold, governmentally and individually, and are refusing to revalue the yuan. What do you trust more, gold, or a dollar that can be anything our bankers want it to be?

[DesertRhino]

The Chinese are hoarding gold, governmentally and individually, and are refusing to revalue the yuan. What do you trust more, gold, or a dollar that can be anything our bankers want it to be?

[danielmryan]

Do any of these investment pros who write these articles know about the basic 20/10/10 rule?

Not that I know of.

[panaxanax]

>>”The Chinese are hoarding gold...”<<

And India, Dubai, Russia, Japan and George Soros, as well.

IMO, buywhat you can now (if you can find it). You may have a minor setback during a short-term correction in prices, but when the SHTF in the global money market you will be a winner.

[darth]

Your point about the current situation is well taken. Looking back at times like the Weimar hyperinflation is instructive, but our times are different.

When I was an economist I used to explain to people that economics was indeed a science. However, imagine how hard it would be for physicists if, for example, the boiling point of water changed often in unpredictable ways. The economy is driven by changes in technology, laws, regulation, consumption patterns, etc. It is a science in which the variables and factors change rapidly.

When I did forecasts for the corporation that I worked for I would show trendlines with diverging upper and lower boundaries. I would explain that trying to forecast just a few years into the future was nearly impossible.

[MichaelCorleone]

“It’s remarkably easy to find evidence for a position you’ve already taken”

Boy, ain’t that the truth...

[Atlas Sneezed]

Do any of these investment pros who write these articles know about the basic 20/10/10 rule?

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Google doesn’t either. Please share.

[stefanbatory]

Stocks are in favor for 20 years, Commodities for 10 years, and a major disaster occurs roughly every 10 years.