Saturday, August 30, 2008
August's monthly candle descended to the upward sloping trend line, and decisively bounced off this level. Furthermore, the price also cleared the horizontal shaded support area, which represents the XAU's previous highs. Both developments are bullish, in my view.
The next chart is a weekly chart of the Euro:
As you can observe, the Euro is testing its upward sloping trend line. At this point, it is holding this level of support, which is bullish for gold and silver. I have no way of telling if this level of support will continue to hold, but for as long as it does, I would count it as a bullish factor for precious metals.
My Renko trend model says that gold's short term trend is neither up nor down. This means that I am unable to take a position until gold decisively moves back up, or fails and continues lower.
In the meantime, I can still indirectly get into the precious metals area by buying Eldorado Gold. This gold stock is on a Renko buy signal, and is showing excellent relative strength against the Canadian gold stocks sector. The following chart shows Eldorado divided by XGD:
Eldorado Gold is one of the only gold stocks that I could find that is still in an uptrend. The fact that this stock was able to hold its ground and withstand the severity of the recent commodity correction is a testament to its strength.
On another note, my stock scanner found another stock to go long this week. The name of the stock is Daylight Resources Trust, and the ticker is DAY/UN.to
As you can probably tell, this stock is in a very powerful bull market. As soon as I bought this stock, it began to appreciate. The reason for this is that when a trend is in motion, it has a tendency to stay in motion. Put another way, at the moment of me purchasing this stock, the probability of it continuing to trend was higher than the probability of it turning around.
In the event that this stock does turn around, which is entirely possible, then I will cut losses once it penetrates the 50 day moving average on a closing basis. Otherwise, it will be held for as long as the trend continues. This strategy allows for potentially unlimited gains, yet limited losses.
Turning back to gold, I feel that the fundamentals are still unbelievably strong, and fundamentally nothing has changed, so therefore I remain bullish long-term on this sector. The video clip below, done by Mike Maloney of GoldSilver.com, is an interview with congressman Ron Paul, and, in my opinion, explains the fundamentals of gold probably better than anybody else:
If the video above is not working, then please click here.
Thursday, August 28, 2008
It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it. Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, "Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I'll be able to buy it back cheaper. So you'd better do likewise. That is, if you've still got yours." Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out.
"Yes, Mr. Harwood, I still have it. Of course!" said Turkey gratefully. It was nice of Elmer to think of the old chap. "Well, now is the time to take your profit and get in again on the next dip," said Elmer, as if he had just made out the deposit slip for the old man. Failing to perceive enthusiastic gratitude in the beneficiary's face Elmer went on: "I have just sold every share I owned!"
Saturday, August 16, 2008
Much of the weakness we have seen in the gold market comes from a rapidly appreciating US. Dollar:
As the above chart illustrates, the US Dollar has exploded past its 50 day and 200 day moving averages, which is short-term bullish. However, the 200 day moving average is still trending down, which means to me that the long-term trend is down.
I never thought I would say this, but the US Dollar at this point is extremely overbought, after devastating all major worldwide currencies this month. For example, the US Dollar has appreciated against the British Pound for 11 consecutive days in a row. Nonetheless, I still feel that this is a counter-trend rally at this point, as the next chart will hopefully show.
The next chart is a weekly chart of the Euro:
The above chart shows that the Euro is still contained within its long term uptrend, and is now testing its bullish support line. I feel that at this point there has been no long-term damage to this chart, and I will maintain this view for as long as this long-term trend line holds.
It is worth noting that we suffered through a sharp correction in the Euro this time last year. If you want to get some background on this, please read what I wrote this time last year.
Finally, here is a weekly chart of GDX:
Gold stocks continued their short term trend downwards this week, and have descended to an area of strong support. As the above chart shows, this will be the fifth time that GDX has tested this support area. It is essential that GDX holds this area on a weekly closing basis for the long-term trend to remain positive. If you are curious to know how this chart played out this time last year, then please read this post.
For my own personal trading account, I continue to hold my short position, since the short-term trend remains down. I am sensing that my position will not last for much longer, but I will let the price make the decision for me. At the same time, for my long term investment plan, I do plan on doing some serious dollar cost averaging of physical silver at my favourite coin shop this weekend.
Sunday, August 10, 2008
The first chart is that of the XAU. It is a monthly chart that goes back until 1981:
In my view, the XAU is still in a very powerful bull market. This is evidenced by the fact that over the last 6 years, we can observe a series of higher highs and lower lows. Furthermore, all moving averages are also positively aligned at the moment.
It is often said on financial news stations that gold or commodities are in a bubble. I could not disagree more strongly with this type of statement. One reason for my view is that if you glance at the above chart, you will notice that gold stocks are still at approximately the same level that they were at 25 years ago. I cannot come up with many other asset classes that are in this position.
For a bubble to occur, the general public must become over zealously bullish on a sector. This has not even come close to happening with gold and silver. As an example, the bank I am employed at offers a precious metals mutual fund. This fund fully makes up 0.03% of assets under management. Contrast this number to the prevalence of high-tech holdings seen during the late 1990's.
The next chart also should support gold's case. It shows the Dow Jones divided by the value of the Gold since 1981:
In the early 1980's, the the Dow and an ounce of gold had roughly the same value. During the 1980's the Dow and the price of gold began to deviate, as the Dow rose, and gold fell. This trend continued well into the 1990's, where the pace began to accelerate, ballooning to the point where the Dow could buy over 40 ounces of gold.
This trend lasted for 20 years, and extended 4,000% against the price of gold. However, since the year 2000, this trend has changed directions, and has been deflating remorselessly since then. This is the real bubble that wall street does not mention.
Since I feel that this concept is so important to understand, I have included the opposite perspective of the chart below. It shows gold divided by the Dow:
A few weeks back, I was listening to an interview with investment guru, Peter Schiff. When pressed for an eventual upside target for the price of gold, Schiff said that he thought that the Dow and gold will eventually have the same value. If this is the case, and I believe that it is, then the chart above has a lot more climbing to do.
Anyway, here is a monthly chart of silver:
Silver is in a similar situation to the XAU mentioned above. Obviously, it is in a very strong bull market as well, and this correction is not unlike the corrections we've seen before.
Keep in mind that these charts present a bullish case for gold for the long-term. I am not suggesting that gold will necessarily rise next week. In fact, I have no idea what will happen next week. For the short term, gold has been in a a very clear downtrend, and following the rules outlined in my previous post, I had no choice but to short gold stocks over the last 2 weeks, and I will continue to hold my shorts for as long as the short-term trend persists.
Wednesday, August 6, 2008
I feel that Renko charts can be used very effectively to determine trends. The chart below is a monthly Renko chart of the Canadian financial sector and goes back three and a half years:
Outlined in the chart above is a buy and sell system that I am using in my own trading. The system has the following rules:
- Buy signals are generated when the price is in a column of 4 white bricks or more and above the moving average line.
- Buy signals are removed when your long position moves against you by 4 bricks
- Sell signals are generated when the price is in a column of 4 dark bricks or more and below the moving average line
- Sell signals are removed when the short position moves 4 bricks against you
By following these simple rules, the areas shaded yellow you would be long, the areas shaded in orange you would be short, and the area where there is no shading you would be neither long or short.
Although these rules are simple, they allow a trader to gain an edge in that they will allow you to:
- Buy strength in bull markets
- Short sell weakness in bear markets
- Avoid getting involved with weak counter-trend moves (like what we have now in financials)
- Cut losses short
- Let winners run
- Separate emotions from decision making
- Avoid hours of analysis or try to predict the future
I sense that most traders are hesitant to following such a simple plan, as it is sometimes felt that making money in the market surely must involve more than this. However, after spending thousands of dollars on books, and years of research, there is no question in my mind that any trading method must involve these rules.