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Here’s Why Gold Is Heading Higher

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Money stackI previously talked about the run-up in silver, but gold is also sizzling hot on the chart and its ramp-up could continue towards the $1,800 and $2,000 levels in a best-case scenario.

In 2011, the world’s central banks accumulated the most gold in four years. The active buying was largely driven by the weaker greenback along with the perceived higher risk in holding U.S. dollars. The Federal Reserve’s worries and its subsequent decision to implement QE3 (a third round of quantitative easing) indicates America has some rough economic times ahead. (Read “Why We Might Not Want to Fight the Fiscal Cliff.”) The same goes for Japan and China, where we are also seeing quantitative easing. All of the easy money is expected to drive spending, and the result will likely be inflationary pressure, against which gold is purchased as a hedge.

And then there is the European debt crisis and the reality that the entire eurozone appears to be heading towards another recession, including the region’s two biggest countries, Germany and France.

On the political front, there is turmoil in the Middle East, and there’s a chance, albeit low, that Iran will be targeted by the United States and the United Nations.

For December, the chart for gold showed a bullish “cup and handle” formation. Gold is bullish at $1,770, well above its 50-day moving average (MA) of $1,648 and 200-day MA of $1,654 on strong relative strength. The moving average convergence-divergence (MACD) is also on the rise and displaying a buy signal. I am concerned by the technically overbought condition and the fact that at the current $1,773, the price of gold is nearly eight percent above its 50- and 200-day MAs. Generally, the moving averages will begin to trend higher or prices will need to adjust downwards towards the 50-day MA and reduce the gap between price and moving average. I view downside moves as an opportunity to accumulate the precious metal given the current macro situation.

Gold Spot Price EOD CME Stock Chart

Chart courtesy of www.StockCharts.com

I favor metal plays and continue to sense investment opportunities, especially in mining companies and junior gold miners. You want to ignore the daily fluctuation in gold, silver, and copper prices and understand that these mining companies will continue to mine.

China and India continue to be the world’s top buyers of gold, and this is expected to continue. China has also been buying mining companies around the world in an effort to increase its reserves. This is one reason why I like some of the smaller mining companies, especially those with a massive reserve of proven metals in the ground, waiting to be developed and needing a cash-rich partner to get the ore out of the ground.

My advice to you is to buy a mixture of exploration-stage gold miners along with small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers. Buy gold and silver stocks on weakness. SPDR Gold Shares (NYSEArca/GLD) is worth a look.

SPDR Gold Trust Shares NYSE + BATS Stock Chart

Chart courtesy of www.StockCharts.com

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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 »

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