Gold Is Entering An Accelerated Trend Channel

Source: Olivier Tischendorf, www.tischendorf.com  (2/10/09)

Gold has history on its side. It is a proven way to preserve one's wealth over time. It acts like an insurance and it is highly unlikely mankind's behavior during the last 6,000 years is going to change anytime soon. Some things never change. Two of those things are human nature and gold's capacity to preserve one's purchasing power.

Gold has history on its side. It is a proven way to preserve one's wealth over time. It acts like an insurance and it is highly unlikely mankind's behavior during the last 6,000 years is going to change anytime soon. Some things never change. Two of those things are human nature and gold's capacity to preserve one's purchasing power.

That said gold has recently reached new highs in various foreign currencies. The chart of gold in Euro terms tells the story of what is to come. Don't take this lightly. This is an important event as new highs typically attract more buying. If the Europeans start allocating more funds to physical bullion demand will increase drastically and gobble up supply. It is reasonable to expect additional upward pressure for the price of gold. Physical accumulation is accelerating on a worldwide basis. Keep in mind gold is a very tiny market compared to the equities market. A change in asset allocation resulting in a small increase to bullion exposure could easily double worldwide demand for gold bullion investment purposes.

A story hitting the wires recently is that: Greenlight Capital's founder, David Einhorn, is finally taking his grandfather's advice. The $5.1 billion hedge fund is buying gold for the first time amid the threat of inflation from increased government spending. Einhorn fund's recent decision to invest in physical gold bullion is testament to increased awareness of gold's bullish long term trend and it looks like this is only the beginning to added buying pressure for gold bullion.' For full coverage of the story click here.

It looks like the price of gold in US Dollar terms is merely lagging other currencies as the US Dollar has been very strong lately. It is still early to draw conclusions as the US Dollar could stay stronger than most people expect but the new accelerating trend channel looks to be a valid one.

So what it all comes down to is that worldwide accumulation of physical gold is accelerating. Hence the odds the gold price is going to accelerate as well are rather high.

If you haven't built a physical bullion position yet now is a good time to think about doing so. I typically recommend holding at least 5% of one's liquid net worth in gold bullion held in your own possession. Increasing that percentage up to 20% isn't that bad an idea either. Although the markets look like they might want to stage some kind of rally right now taking a longer term perspective indicates the gold trend is going to make you more money than buying the S&P500 via the SPY.

Gold should reach new highs in US Dollar terms soon following the lead of foreign currencies like the Euro, the Canadian Dollar, the Australian Dollar, the Swiss Franc and the British Pound Sterling to name a few. As long as the lower trend line of the new dotted trend channel is not breached 'the trend is your friend' and you should hold on to your gold bullion position. You could use that level to protect your position with a stop loss.

If you want to be more aggressive you should consider buying silver bullion. The silver market is much smaller than the gold market so the market is considered to be a riskier one. But once the public is going to stress silver's monetary significance as opposed to viewing it simply as another commodity silver prices will increase significantly and should ultimately outperform gold. I recommend closely watching the gold - silver ratio for clues. Historically the ratio has showed to be lower than the actual one. Watch for the ratio to go back to the 55 level and overshooting to the downside as soon as silver garners more interest.

You can easily keep track of the three charts and how they evolve over time by visiting my public list.

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Olivier Tischendorf
www.tischendorf.com

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