Greg Guenthner

Your reasons for owning gold don’t matter to me right now. It could be that you want to protect yourself from the declining dollar. Or perhaps you believe foreign demand will increase prices. Readers of these pages will have plenty of ammo for a bullish gold argument at hand. So, rather than lecture you on why you should have your very own stash of shiny yellow metal Instead, I want to help you buy it for the best possible price.

Even if you’re a long-term investor, it’s important for you to time your gold purchase in order to get the most out of the investment. And right now could well be an excellent buying opportunity…

Shortly after gold started to move higher in September, I told my readers about three new buying opportunities to exploit before gold attempts to make new all-time highs. Despite its recent breakout, gold had simply moved too far, too fast. That’s why I thought you should wait for a better-timed entry, instead of getting caught chasing the price.

Here’s what I wrote in September:

“Gold is running out of gas as it approaches resistance at $1,800. It will probably need to rest or retrace before attacking $1,800…

“If and when a pullback occurs, give gold several days to a couple of weeks to move down and/or sideways. Eventually, the price will tell you where and when support will be.

“Once gold moves higher from its new support level, you will have found your low-risk entry point. If I had to guess right now, I would say you might have an opportunity to buy near $1,725…”

Let’s turn to a chart to see how this idea is playing out:

Gold - Spot Price (EOD) - 1

Gold indeed turned south at $1,800. As you can see from the steep run-up that began back in July, we were given clear indication that overbought conditions would probably cause the spot price to stall out at the top of its trading range.

Now that gold has had the chance to blow off some steam, we can see a potential buy price right around my original guesstimate: $1,725. In the above chart, I added a dotted line to show the higher lows gold has posted since the late summer. As I type, the spot price is bouncing perfectly off support. That’s great news for gold bulls — and a sufficient low-risk entry if you’ve been looking for the right time to make your move.

If you’re taking a shorter-term trade, you can feel confident that the bounce is intact as long as the spot price continues to respect the trend, registering in a series of higher lows and making another go at $1,800. If you’re a longer-term investor, you might want to opt to use recent lows near $1,550 as your sell signal. This level has been the very bottom of gold’s trading range all year. A drop below $1,550 would signal the beginning of what could potentially become a much larger correction.

Another Way To Look At Gold…

Looking ahead, it’s important to keep an eye on the performance of stocks to guide your gold buying. While it’s true that gold has outperformed the S&P 500 over the past three-plus years, the two have essentially traded in the same direction, with the exception of the late 2011 correction:

Gold - Spot Price (EOD) - 2

The arrows on the left side of the chart mark where stocks and gold diverged. As of the beginning of 2012, the relationship returned to “normal” for the time being.

My original thinking was that if gold and stocks’ relationship remains intact, the yellow metal could correct with the stock market. But as the calendar flipped to November, you can see the S&P and gold beginning to diverge once again—a potentially ominous sign for stocks…and a catalyst that could set up a gold rush like we saw in 2011.

Still, if you’re thinking about making a buy right now, you need to respect the possibility that slumping stocks could drag gold down with them. Only time will tell.

Either way, invest with your plan — and always have a stop loss in mind. It doesn’t’ matter what your investing time frame is, you must be prepared in case the market moves against you. After all, you can always buy back a position at lower prices if the market gives you the opportunity.

Sincerely,

Greg Guenthner, CMT
for The Daily Reckoning

Greg Guenthner

Greg Guenthner, CMT, is the managing editor of The Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.

  • jack

    if the markets are rigged, aren’t charts are useless?

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