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As I’ve written before, gold presents a real dilemma for investors. On the one hand, having exposure to hard assets like precious metals in your diversified long-tern portfolio is a good idea. You want that safe haven of hard assets to provide some stability.
On the other hand, precious metals are not the most stable of hard assets. Because gold price trends tend to last for many years, holding it during a downtrend defeats the purpose of holding the metal at all.
That’s why I think that gold has only two real purposes for those who want exposure. You hold it because you think there is enormous systemic risk in the global economy — and there are plenty of people who think that’s exactly where we are — or you trade it.
Trading gold is dependent on various forces, primarily events involving currency and technical analysis. As it happens, those factors have occurred simultaneously, and that suggests it’s time to buy gold.
Currency
The Swiss National Bank made a bold move last week. It tossed out its cap on the currency’s value against the euro. The cap was originally put in place to battle the recession and inflation, because the franc had become so strong against other currencies.
The stronger the franc became against other currencies, the more expensive its exports are in other countries, and the cheaper imports become. That’s all bad news for the Swiss economy.
Removing the cap came along with pushing short-term interest rates below zero. The idea here is that it keeps foreigners from making investments in Swiss francs, and that would result in a kind of loose cap.
There are plenty of theories as to why the Swiss National Bank made this new move, but what’s more important is perception. The market views the move as increasing the perceived risk of holding Swiss francs. It also means the SNB does not need to buy euro-denominated bonds in order to defend the cap it had instituted.
If it is riskier to hold currency, what else can people do but either buy other currencies or buy gold? As it happens, they are doing both, but it’s gold we are interested in.
Technical Analysis
I generally don’t pay attention to technical analysis. We are fundamental investors here at Wyatt Research. However, technical analysis does have a place when it comes to trading in that it can help identify entry and exit points – especially for commodities, which don’t trade on fundamentals.
As you can see from this chart, courtesy of StockCharts.com, gold has broken through three different points of resistance. There was a downtrend line at about $1,220, the 200-day moving average at about $1,250, and the long-term downtrend line at $1,280.
That kind of powerful move up, breaching three difference levels of resistance, is a very bullish sign in my experience. Even better, this next chart shows that there is a very solid technical floor around $1,150, about 10% below the breakout point.
One other note I pointed out recently is that the NAV of the Central Fund of Canada (NYSE:CEF) was trading at a near-historic low of more than an 11% discount to NAV. That suggested a move up was coming.
Trades
Depending on how aggressive you are, there are three obvious trades. The first is to buy either the Central Fund of Canada or SPDR Gold Shares (NYSE:GLD).
The second choice is what I did on Tuesday morning. I went long the ProShares Ultra Gold Bull 2x ETF (NYSE:UGL), which is a leveraged play, offering you twice the returns of gold.
If you are super-aggressive, you can buy the Direxion Daily Gold Bull 3x ETF (NYSE:BAR).
But beware! Gold is very unpredictable. I have never actually successfully traded it, and while I believe I have it right this time, I would set a stop loss.
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