Monday, February 23, 2009


Bull markets move like advancing armies – they take out one objective at a time. Last week, gold and silver each took out an important objective by closing above key points that had previously provided considerable resistance.

On Wednesday, February 11th, gold closed above $930, but silver that day was stopped at $13.50, its 200-day moving average and a key resistance point. Silver did not retreat, however. It remained firm and finally won the battle by breaking above this resistance point on Friday, closing at $13.62.

For the week, gold rose 3.0%, while silver climbed 3.5%. Because the dollar was generally stronger last week, the precious metals did even better against the euro and British pound. Gold and silver rose 3.2% and 3.7% against the euro respectively, and advanced 6.1% and 6.6% against a very weak British pound.

Gold and silver may consolidate these recent gains, which would not be unusual. Then again, the technical position for gold looks very powerful. And silver has been in backwardation since January 21st, an extraordinary 18 days in a row. So it is entirely possible that the precious metals may continue climbing higher from here.

Gold has been in a correction since making its record high eleven months ago. But look what gold has accomplished.

Gold formed a ‘head & shoulders' bottom during its correction, with the neckline just above $900. H&S patterns typically mark a reversal in trend, and in this case, signaled that the downtrend formed during gold's correction was ending. Support at the neckline was re-tested early in the week, but the break-out from the pattern was confirmed when gold broke above $930 to make a 7-month high. What's more, gold thereafter broke the downtrend line marking the highs formed during its correction.

As a consequence, the next objective for gold is its $1,003 closing record high. I think gold clearly has that record within its sights.

There is one other chart I would like to share with you. Bill Murphy presented it on Friday in his commentary at It's another one of the informative charts prepared by Nick Laird This chart plots both the gold price and the weight of gold recorded in GLD, the gold exchange traded fund (ETF).

When I look at the above chart, one key question arises immediately. How can a 150-tonne increase in demand for metal in recent weeks translate into such a relatively small increase in the price of gold? This disparity raises more questions as to whether the ETF really owns the metal supposed to be backing the shares it issues.

I'm no fan of the precious metal ETFs, and haven't been since they were first launched. I've written extensively about the ETFs to record the risks as I see them. These writings can be found at the following links.

In short, the ETF is at best a trading vehicle, and not an alternative to owning physical gold. In this sense, the ETF is like a futures contract, which of course is not an alternative to owning physical gold either. With these trading vehicles you have exposure to movements in the price of gold, but they also come with counterparty risk, which should of course be avoided because of the ongoing economic and financial problems around the globe. The lessons in this regard were learned in September when Lehman collapsed and AIG was on the ropes, which caused numerous commodity ETFs in London to suspend trading.

So if you want to trade the price of gold, trade futures or ETFs. But do not view futures or the ETFs as an alternative to owning physical gold and silver.

If you are still not convinced, or even if you are, I recommend reading an article by Jim Sinclair which questions the integrity of GLD and the other gold ETFs. His February 12th report entitled "Where Do All The Gold ETFs Get Their Bullion From?" can be read at the following link:

In conclusion, gold is so far this year doing pretty much what I have been expecting. Here's what I said back in December:

"Gold will climb into 4-digits in the first quarter...In short, 2009 is shaping up to be the key "break-out year" for gold. It will become a "break-out year" because the average investor will start becoming aware of gold and begin buying. Despite its remarkable performance throughout this decade, few people own physical gold. That will begin to change in 2009 as the financial disruptions will worsen and people seek a safe haven for their money."

Only time will tell of course whether my forecast proves accurate or not. But the key message in the above quote remains clear. Everyone should be seeking a safe haven, not a trading vehicle.

Gold is the safest haven of them all, but only when you own physical gold, and not a trading vehicle. So avoid the ETFs and their risks. Avoid futures too. Own physical gold instead.

Published by GoldMoney
Copyright © 2009. All rights reserved.
Edited by James Turk

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