Gold Bounces Off 144-Day Moving Average Yet Again

Wed, Oct 26, 2011 - 3:15am

Yesterday was one of those days when you’re glad you owned gold.

It was up about $50 an ounce on the day. It’s rising again this morning. Silver was up over 5%.

Both made the bulk of their moves in just a few minutes – it would have been very difficult to catch. You had to be positioned already.

Which, of course, you were, because you bought some more last week, when somebody recommended that you do so.

I don’t know why this technical indicator works – but it does

James Randi is a paranormal detective. He investigates paranormal or pseudo-scientific claims and usually exposes them as frauds, often hilariously. In fact, he has set up a whole foundation to do this.

I’d love to know what he makes of technical analysis. Some dismiss it – with a fair amount of justification – as hocus pocus. Others rigorously practice it.

But, in particular, I’d love to know what Randi makes of gold and the 144-day moving average (144 dma – the average price of gold over the previous 144 days).

The more I publicise it, the more likely it is to stop working, so I should keep my mouth shut. But it just keeps on catching those bottoms in gold with unerring consistency. There will come a time when it stops working, but while it does, let’s use it and enjoy it.

Perhaps it’s coincidence (possible). Perhaps Fibonacci numbers really do permeate everything in the world (possible). Perhaps the entire global gold market follows my articles on gold and uses the 144-day moving average (would love to think so, but I doubt it somehow, despite what my mum says). Who knows?

But for all the drama in gold over the past month, for all the ‘gold is in a bubble’, ‘gold is going back to $750’, ‘it’s deflation’, ‘the bull market is over’, gold has merely returned to its average price of the last 144 days and found support.

The red line in the chart below is the 144-day moving average. The answer to the question I posted below a month back (which is written on the chart below) is a resounding ’yes’.

Gold is up 20% on the year, and it has been a horrible year for most things. And all that hot speculative money has been rinsed out of the market.

Spring and Winter

I expect we’ll visit ,650 an ounce at some stage. I remain of the mind that we won’t see new highs until 2012, possibly by the spring, more likely by the autumn, but I don’t care if I’m wrong about this. In fact, I hope I am. The point is the bull market is still intact ladies and gentlemen. Who knows? One day the junior gold shares might even catch up.

I can only speculate about this. I don’t have any data to back it up, beyond signs of growing demand for physical gold. But I believe more and more gold is now held by so-called ’strong hands’.

These are people who have bought gold because they understand it, because they see what governments are doing to money, because they want to protect themselves and preserve their wealth and so on.

When they see the time is right, when the signs are there that green shoots are starting to appear through the snow, signalling the arrival of economic spring, then they’ll roll out of gold and start investing again, putting their money to work in business, in real estate, in whatever they see fit.

Then there’s the type of investor who just buys gold because it is going up. He thinks he can make money out of it. Often he does. He doesn’t care that it’s gold he’s buying. It could just as easily be a telecoms company. He doesn’t care about governments debasing our currency. He’s not bothered about whether or not people understand that society needs to be built on a foundation of honest, independent money.

At the first sign of a liquidity squeeze, he’s out. These types are what bring the excess into the gold market - when gold gets ahead of itself and becomes overbought or oversold.

The irony is, this same speculator will often buy physical gold with the profits of his speculation - gold which he may well sell and invest elsewhere come the end of this economic winter. Thus more gold falls into ’strong hands’.

And thus the same individual might be both a strong and a weak hand.

When the bull market gets closer to its end, the ratio of weak hands to strong may well increase. Strong hands may well move out of gold if they see compelling relative value elsewhere. Meanwhile, more weak hands may get involved because of the speculative excess that is typical of the end of bull markets.

For now though, I see more and more strong hands. Certainly, the reports from bullion dealers show that more and more people are buying actual physical gold.

A quick glance across the channel at the floundering leaders of Europe attempting to deal with Greece (and the rest) shows the latest chapter in the great, global, economic unravelling. We’ve still got a great reckoning in China to come; we’ve still got the undoing of the government bond market and the scourge of higher rates; the debt chickens of the US and UK are yet to roost and we may even have a dollar crisis to boot. All this and more to look forward to.

So stick with your gold. Economic winter is not over.

(You can view a gold chart with the 144-day moving average here.)

My latest gold report is now available – as well as looking at ways to buy gold itself, I’ve also tipped some speculative mining stocks that I think are poised to do very well in the coming years, and provided some updates on my previous tips. Get your copy of my gold report here.

This article first appeared in Money Morning, the free daily investment email from UK investment magazine, Moneyweek. Sign up here - it's free.

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