The chart that will make you bullish on gold
Since the beginning of the year, gold bullion has gained a significant amount of attention. The precious metal has increased about 14% in value and has become one of the best-performing asset classes. Key stock indices, on the other hand, are down.
With this rise in gold bullion prices, we see an increasing amount of pessimism. In 2013, we heard the metal was a slam-dunk sale. Now, the warnings are a little tamer, but we are told $1,200-an-ounce gold bullion is very possible. The mining companies that have increased in value will see a pullback.
Before going into further detail, please look at the chart of daily gold bullion prices below.
Chart courtesy of www.StockCharts.com
As I have written about in these pages before, I am bullish on gold mainly because of one fundamental reason: the demand for the yellow metal is much higher and constraints to its supply are increasing.
But this isn’t all. When I look at the charts, my bullish convictions for higher gold bullion prices become stronger.
Ask any technical analyst; they will tell you to treat the trend as your friend, follow it until it breaks. Since late 2012, gold bullion prices were trending in a downtrend (black line on the chart above). This changed. In June of 2013, we saw the precious metal’s prices decline below $1,200, and then in December, they tested those levels again. As this happened, there was one phenomenon no one talked about: there was no follow-through—meaning gold bullion prices never declined below their lows. Instead, there was a formation of the chart pattern called the “double bottom.” In February of this year, that trend was broken.
At the same time, we saw gold bullion prices break above their 50- and 200-day moving averages. This is very bullish for the precious metal. It tells us that the long-term and short-term trends are changing directions.
In addition to all this, we see the momentum is in the hands of the bulls. This is confirmed by the moving average convergence/divergence (MACD) indicator. As gold bullion prices were making a double bottom, we saw the MACD trend higher—this was another bullish case in the making.
Going forward, I expect a few things to happen: with increasing pessimism, the price might decline a little, but there’s a significant amount of support available around the $1,350 and $1,300 levels.
Gold bullion prices still have quite some way to go to the upside; investors who are looking to profit should act accordingly. The choices are many. If they plan to attain leveraged gains by buying into mining companies, know that not every company is the same. Look for companies that have reserves and resources in stable countries with declining production costs.