- Dugald Malcolm, Montreal, Canada
It seems to happen without fail: every time gold makes a corrective move to the downside, the critics and talking heads start yammering on about how the ‘gold bubble’ has burst. And every time they do, I feel I must pull out the gold chart and demonstrate how these arguments are nothing if not ludicrous.
The above is a weekly chart of gold. We can see that the price channel from 2005 (which, I might add, is even steeper than its longer-term trend line dating back to 2001) is still very much intact. So, even if the short-term trend line, which I highlighted in green, breaks, there is still solid support below. A significant break to the downside seems unlikely, however, as the MACD remains well above the zero line and the +DI has yet to give a sell signal by crossing below the -DI line. The stochastic too suggests that we are approaching the oversold level. As you can see, when the stochastic does make a rare fall below the 20 line, it neither gets very far nor does it stay there for long.
But don’t take my technical word for it – how about some fundamental analysis from a true guru, John Embry.
For those who are not familiar with him, John Embry is the Chief Investment Strategist at Sprott Asset Management in Canada. He manages the very successful Sprott Gold & Precious Minerals Fund and is widely considered an industry expert when it comes to precious metal, and especially the gold sector. His views have become so popular, in fact, that he had to stop providing stock picks during the various interviews he was doing for a Canadian business television program. It seemed as soon as he would mention the name of a company he liked during the interview its stock would instantly soar and inflate in price. So, it would go without saying, that when John Embry speaks, one should listen.[adcode]
In a recent edition of Investor’s Digest of Canada, Mr. Embry addressed the misguided concept of a bubble existing for both gold and silver:
Gold and silver are constants. Their Current appreciation relates primarily to the debasement of the currencies in which they are quoted, a debasement incidentally which is rapidly accelerating.
Thus the idea they are in a bubble is beyond preposterous unless one honestly believes that the authorities can and will rein in the pace of money creation throughout the world. The simple truth is that they can’t in our debt-logged universe unless they are prepared to accept a deflationary crash that will make the 1930′s look like child’s play.
In addressing the topic of the recent correction in gold prices, Mr. Embry suggest that the low for gold we shall see in this correction will be the lowest gold will go for 2011, “and thus it is essential that investors take advantage of this opportunity.” I, for one, will be taking Mr. Embry’s advice. As soon as I see the technical indicator firming up, I too will “take advantage of this opportunity.”
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