I might as well come out and say it: I just don’t like gold as an investment at this time. Let me explain.
At the moment, you could trade the yellow precious metal by buying on weakness and selling into strength, but in this stock market, there’s really no other reason to hold the yellow ore.
Back on September 18, the price of gold surged to over $1,350 an ounce after the Federal Reserve decided against tapering its bond buying. The feeling was that the continued cheap money would fuel growth in the emerging markets and gold. However, I’m not sure that the move was entirely justified.
In August, I talked about my bearish view towards the yellow metal when prices were at $1,335. (Read “Yes, We’re Bullish on Gold, But Here’s One Bear’s Case Worth Reading.”) Fast-forward two months, and I continue to not like gold or see any reason to want to hold it unless, of course, tensions in the Middle East pick up or the U.S. economy tanks into another recession. The metal is generally acquired as a safe haven against a major global risk, and at the moment, I don’t see one.
Global inflation is benign. With the global economy growing at a moderate rate, inflation is under wraps, and I doubt it’s going to change in the immediate future.
Now, take a look at the following price chart of gold from a technical analysis point of view.
Chart courtesy of www.StockCharts.com
First of all, note the bearish “head and shoulders” formation on the chart, marked by the three short horizontal lines. Also note the long horizontal line, which reflects the neckline support. A break below this could drive prices towards $1,200.
Prices could surge higher if investors feel the government shutdown could last more than a few days or if there fails to be an agreement on the debt ceiling before the October 17 deadline. Under this scenario, the country will not be able to pay its debt holders and its debt could likely be downgraded. In my view, this is really the only supportive thing that could drive gold prices higher.
If the shutdown is over soon and a debt ceiling deal is reached, I could see gold heading lower.
At this point, I’d recommend that you play gold only if you are a trader. I would not be a buyer for the longer term at this juncture.