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Will Moving Averages Deter Gold Investors?

Commodities / Gold and Silver 2011 Dec 17, 2011 - 08:02 AM GMT

By: Eric_McWhinnie

Commodities

Red has been the color of choice for gold and silver this week. On Wednesday, gold fell below $1,600 to close at its lowest level since September. Meanwhile, silver fell below its $30 support level. Although many were quick to declare the bull market in precious metals dead, many investors questioned the call, because the long-term fundamentals have not changed.


Investing in precious metals takes discipline, patience and nerves of steel. Sharp pullbacks, as in the price movement seen this week, are nothing out of the normal for gold and silver, especially during a liquidity crunch. In October 2008, gold declined from $900 to $712 in a matter of just two weeks, representing a decrease of 21 percent. In the same period, silver fell from $11.75 to $8.90, representing a 32 percent fall. However, this did not change the long-term picture, and precious metals went on a multi-year surge after central banks stepped in to provide liquidity to an insolvent financial system.

Wednesday’s pullback in gold caused the gold bubble claimers to also point to the 200-day moving average as evidence of a bubble pop. For the first time since January 2009, gold fell below its 200-day moving average. However, a cherry-picked technical support level does not justify a change from a bull market to a bear market. Gold advocates can just as easily point to gold’s 300-day moving average as a counter-argument. Going back to 2001, gold’s 300-day moving average has offered strong support to the ongoing bull market numerous times. However, gold broke below the 300-day moving average in August 2008 and stayed there until January 2009. It has been above the 300-day moving average for all but three days in April 2009 since then. The fact that gold fell below this longer-dated moving average support level did not deter investors in the long-run. Gold investors hold the precious metal as a hedge against fiat currencies, not because they trade above or below moving averages. As Kyle Bass explains, “Buying gold is just buying a put against the idiocy of the political cycle. It’s that simple.”

Gold’s recent fall below a moving day average will not discourage gold investors. The factors leading to the precious metal bull market are still in place. Central banks and governments around the world continue to reduce interest rates and try to solve the global debt crisis with more debt. In the U.S., the Federal Reserve has held interest rates artificially low for years, and continue to pledge record low interest rates till at least mid-2013. Pimco’s Bill Gross, manager of the world’s largest mutual fund, believes the Federal Reserve may keep their current zero interest rate policy until 2016. This is bad news for savers, as inflation will exceed the yields on savings accounts. Precious metals began their latest bull market in the early 2000s when Alan Greenspan dropped interest rates to stimulate the economy after the tech bubble. With Ben Bernanke keeping interest rates even lower, there appears to be years left in the gold bull cycle.

For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.

By Eric_McWhinnie

http://wallstcheatsheet.com

Wall St. Cheat Sheet : Only days after the S&P 500 crashed to the depths of hell at 666, the Hoffman brothers launched Wall St. Cheat Sheet: one of the fastest growing financial media sites on the web. Like a samurai, our mission is to cut through the bull and bear shit with extraordinary insights, a fresh voice, and razor-sharp wit. We provide the highest quality education and information for active investors, financial professionals, and entrepreneurs.

© 2011 Copyright Eric McWhinnie - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors


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