On Monday something occurred that doesn’t happen all that often, both the U.S. dollar and gold rose. Many consider gold as a hedge against inflation and a weak dollar so gold bugs had to have been impressed when gold moved higher even as the dollar broke out. Trying to figure out why this may have happened (we have our own theory) is tricky, but looking at the chart of gold and analyzing it is quite simple.
After whipping around from 1,900 down to 1,700, back up to 1,900, only to go back down even lower to 1,550, and then pressing higher to its current price around 1,660, gold has been on a roller coaster ride the last two months. However, the chart remains very much in tact. In fact, gold found support in a previous area of price congestion from late July and consolidated nicely. After channeling 1,600 – 1,650 for the last week or so, gold broke out above 1,650 on Monday. The breakout now sets a bottom in place and traders can get long using the 1,600 (or the low around 1,550 depending on your risk tolerance) level as a stop loss.
We feel one of the best ways to play a potential move higher in gold is with UGL or by buying calls on GLD. What’s more, we like gold from a sentiment perspective because many, including us, have started to question its supposed “safe haven” status. And there is no better time for a bullish trend to continue than when people are starting to get bearish.
So why did gold move higher Monday in the face of a stronger dollar? We think it has everything to do with Europe. For the last two years our federal reserve has printed money (see quantitative easing) which has weakened our dollar and in turn helped gold ascend to record highs. But now we feel that it is Europe who is going to have to print money in order to bail out debt ridden countries like Greece and possibly many more soon (see Italy & Spain). Such euro printing would devalue the currency, and when a main currency like the euro gets devalued, it adds to golds allure as a currency. A devaluing euro will also likely lead to more gains for the dollar. So that is how you get a rising dollar and rising gold all in the same boat. Now for the fun part… watching to see how this plays out
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