Monday, July 30, 2007

Always Keep the Long Term Picture in Mind

I'm afraid that some visitors to my site feel that I am contradicting myself when I simultaneously post evidence in favour of gold, and evidence against gold. The key point to understand is that when I do this, it is always in reference to different time frames.

One of the founding fathers of technical analysis, Charles Dow, stated that in any market there are trends within trends. Dow said that there are three trends within the stock market, which basically are short, medium, and long term trends.

A few posts ago, I said that the Euro was overbought and due for a correction. After this post, I made another post saying that the Euro was looking excellent for the long-term. A day after this post the Euro experienced the biggest decline for 2007. So, I was right when I said that the Euro was due for correction, but was I wrong about saying that it looked excellent for the long term?

Let's have a look at the long term monthly chart BEFORE the big Euro correction:

As you can see, the Euro is in a powerful uptrend, and the whole chart, in my opinion, looks very bullish. Now, lets have a look at the same chart, except AFTER the big Euro correction.

As you can see, even after the biggest correction for 2007, the Euro chart is completely unscathed, which means the long term trend is still, without a question, intact. After large corrections like the one we just experienced last week, it is important to keep the long term trend in mind.

Gold, Silver and the Euro are all in long term uptrends, while the US Dollar is in a long term downtrend. Personally, I keep about half my money in silver bullion to capitalize on this fact. With the other half I trade gold stocks on a short term basis. When I feel short-term bearish, I will go short gold stocks, but this really only has the effect of hedging my long-term core position.

Also, if anybody sees anything on the charts that indicates that gold stocks have bottomed out, let me know. I'm still not quite ready to jump back in, but maybe you see things differently. Write a comment if you do. Thanks!

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