As we can see from the above chart gold has performed magnificently by bursting through the $1000/oz barrier before dropping back to take a well-earned breather.
The two points of note on the chart, in our humble opinion, are that the gap between the price of gold and its own 200 day moving average is still significant at $100 plus, which can be interpreted as negative for gold. The other significant point is that the MACD could experience a golden crossover shortly if the black line turns up through the red line, which is usually a positive sign for gold.
However we now face the possibility of a seasonal sell off in May which could predicate another summer of the doldrums for gold and precious metals mining stocks. We could also be hit by another bank going to the wall thus launching the financial lifeboats in yet another salvage operation. Longer term this sort of incident will propel investors to find a safer haven than paper currencies, but in the short term we could see a scramble for cash that means the baby gets thrown out with bath water, thus gold’s progress may be inhibited. Also bear in mind that record high prices do tend to deter all but the most ardent of buyers. The ‘popping up’ behaviour of the oil price also comes into play along with the behaviour of the US Dollar, which appears to be going sideways at the moment. However, Britain has just reduced its base rate and the indications are that there are more rate cuts to come, with Euro zone also looking towards lower rates.
Is now the time to increase our exposure to gold and its associated stocks you ask? In general we have to say no, despite the euphoria that surrounds precious metals at this time. However, if your favourite stock has been dramatically oversold and you are comfortable with a purchase at today’s price levels then go ahead. As we see it ‘selectivity’ is the order of the day, as a broad based advance will not materialise until September, pretty much the same as it did last year. However this year’s third quarter advance will be much dramatic than that of 2007 as gold’s story is longer the preserve of a few. Media coverage is on the increase and gradually more and more investors are diverting some of their investment funds into precious metals sector, which is tiny by comparison to some of the popular sectors in the mainstream. We can see this from our mailbag when new readers ask questions of a very general nature, indicating that this is their fist step towards making an investment in precious metals.
In conclusion do not be panicked in buying anything with gold in the title, pick your shots very carefully and be prepared to hold for at least twelve to eighteen months and you should do very well indeed.
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