Trading Ideas

September 24, 2010 7:10 pm

Trading Ideas: Still going for gold

Ben Bernanke is a keen student of history. And the Federal Reserve chairman’s studies have convinced him that the Great Depression of the 1930s was greater than it needed to have been, largely through the fault of the institution he now heads.

Had only the Fed prevented the money-supply from shrinking so dramatically, he believes America could have been spared the worst effects of its most notorious slump.

So, determined not to repeat the error of his forebears, Bernanke is committed to conjuring as much money out of thin air as is necessary to counteract today’s crisis.

However, the prospect of further paper proliferation is making many investors uneasy. Waning faith in traditional currencies has driven the price of gold to a new all-time high of $1,298 this week.

But, while gold makes an attractive alternative to state-issued money, governments do not take kindly to competition. As Bernanke will be well aware, the US government of the 1930s summarily outlawed its citizens from owning gold and confiscated as much as it could. Today’s currency-sceptics may therefore want to think about the form in which they own gold and where they hold it.

I said on April 16 – when gold’s price was around $1,170 an ounce – that it was likely to head for $1,279 and advised buying on lows occurring around May 28 and July 16. While the first date came close only to a minor bottom, the latter date proved to be within eight trading days of gold’s summer trough at $1,159.

And this week, the yellow metal achieved my target of $1,279, turning attention to my subsequent targets at $1,405 and $1,536. Looking even further out, my projections highlight the potential for it to exceed $2,000.

The main issue for me is the route by which gold reaches these targets. The metal is somewhat overbought now, although not by as much as it has been at previous significant highs.

So, while the current up-thrust could well extend towards $1,337, I am minded to await the next correction before attempting to buy more gold.

I would be very interested in buying on lows occurring around December 3, January 7 and March 25.

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