Get Ready for Gold Prices to Break Out

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Gold is unquestionably the most frustrating trade I’ve ever tried to make in 20 years of investing. The main problem is there is simply no way to predict gold prices or even attempt to ballpark where gold prices might go in any given time period. Gold prices are subject to so many crosscurrents that trying to trade the yellow metal has always flummoxed me.

Gold prices

About the only thing you can count on with respect to gold prices are a few indicators that might give you a leg up in trading. We may have confirmation of direction from those indicators in the next few days. You just need to decide if you want to go long, go short or stay away from gold altogether. I suspect that whichever way gold breaks, it is likely to be for a significant time period.

Of course, it’s gold, so anything can happen.

Indicator No. 1: CEF Discount

The first indicator is the discount at which the Central Fund of Canada Limited (USA) (CEF) trades to its net asset value. The CEF ETF holds actual gold and silver bullion in its vaults at a ratio of 60.8% gold, 38.7% silver and 0.5% in cash. The market value of these metals is about $3.39 billion, or about $13.34 per share. Yet the CEF ETF only trades at about $12.04 per share.

Check out this chart, courtesy of DecisionPoint and StockCharts:

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You would expect a security to trade at or near the NAV of the underlying assets and these securities eventually revert to the mean. That means that either the value of the CEF ETF will rise to meet gold prices or gold prices will fall to meet the ETF’s price. The last time the NAV sold at this discount was in 2002, before gold prices began their great bull market.

Indicator No .2: 200-Day Moving Average

The second indicator is a technical one. I rarely use technical analysis, but for trades like this, it can help to confirm a breakout or failure. This chart below (courtesy of DecisionPoint and StockCharts) shows that gold appears to be breaking out from a triple bottom and headed towards the declining 200-day moving average.

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If it breaches that level at around $1,260 and then the $1,280 level, I’d say that would be confirmation to go long. But gold has fallen back to $1,190. That means it could be re-testing support. The more times it bounces off support, the better the chance it will move strongly upward. That provides even more reason to go long.

However, if gold fails and breaches $1,140 decisively, then the market is telling you that the NAV discount of the CEF ETF was telegraphing the decline in gold prices, and you might want to go short.

In either case, be sure to use stop losses and beware of using leveraged ETFs. I suggest you go with the CEF ETF, or possibly with SPDR Gold Trust (ETF) (GLD), on either your long or short. I suggest using a 7% stop loss. If you strike out on your trade, don’t let it get to you.  Gold isn’t for everyone.

Lawrence Meyers does not have a position in any security mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2014/12/gold-prices-break-gld/.

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