Should Investors Hold Out for $1,300-an-Ounce Gold Before Investing?

By Friday, December 6, 2013

U.S. dollarWhen I previously wrote about gold, prices were around $1,316 an ounce and subject to a bearish head and shoulders formation on the charts, as you can see below. (Read “Why Gold Might Only Be Good for Traders Right Now.”) I was bearish on the precious metal then and continue to be so, at least when considering it as a buy-and-hold investment rather than a speculative trading opportunity.

Spot gold has fallen below $1,225 and appears to be set to take a run at the key support level of $1,200, according to my technical analysis. The reality is that even with the 7.5% decline from early October, I would still not be a buyer at the current price, unless I wanted to trade the yellow ore and hope for a possible oversold technical bounce back above $1,250.

Gold - Spot Price Chart

Chart courtesy of www.StockCharts.com

Instead, given the attractive buying opportunities in the stock market, I’d advise more conservative investors to invest their dollars in stocks, rather than gold bullion at this time.

Some of the underlying fundamentals that have traditionally supported the metal are not evident. Yes, China is continuing to accumulate physical gold, but buying by India, which is the world’s largest buyer of the precious metal, has been stalling.

In addition, the yellow metal usually receives a lift from a weaker U.S. dollar. With the greenback showing some recent strength against other world currencies, especially in the emerging markets, the precious metal isn’t seeing any support from a weak dollar.

Inflation, a historically supportive variable for the precious metal, has also been largely benign across the world economies (with some exceptions). Without inflation rising higher (in spite of the exorbitant amount of easy money being pumped into the global economy), I just don’t see why anyone, aside from speculative traders, would buy the precious metal at this point.

Traders may begin to look at gold as a speculative trade if prices head down toward $1,200 and below, as shown on the long-term chart below, which dates back to 2004. There is some decent support around $1,200, but the problem is that a failure to hold could see the metal fall towards $1,100 and $1,000, as shown by the lower blue horizontal support line on the following chart.

Gold - Spot Price Chart

Chart courtesy of www.StockCharts.com

So unless you are a persistent gold bug that has remained loyal to the yellow ore since the $1,800 level in 2011, I would be hesitant to add gold as a buy-and-hold investment; instead, I continue to look for opportunities in equities. If gold prices do bounce back toward $1,300, I might consider entering the market on the short side and sell gold, as the fundamentals, at this time, don’t appear to be there. In the current market, gold investments are most beneficial to speculative traders.

About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »