So far in 2010, all eyes in the gold market have been looking up at $1225 wondering whether gold get back to that all time high?  Now that question has been answered yet another arises, where next for gold?

 

Our answer to that question is that we believe this rally still has gas in the tank to run higher.  Gold didn’t break its resistance at $1225 just to climb another $24 or 1.95% to $1249.  There must be more in this move.

 

Considering the chart above, gold appears overbought and prime for a drop.  The relative strength index is at 72.68 and above the 70 level which would normally be a sell for us.  Although we always load up heavily on gold when the RSI is on or below 30, we never sell when the RSI hits 70 during major rallies. 

Why?  Well, simply because when gold decides to go on a run it generally disobeys the RSI overbought reading as it simply continues higher.  

A textbook case of this is during that run to $1225 in late 2009, the RSI was well above 70 in early November while gold was just $1100.  Selling in early November because of the RSI reading would have missed a whole $125 move upwards.  And shorting the yellow metal at that time would’ve proved fatal.  With this example fresh in our memories, we will not sell gold when the RSI gives us a sell signal during major rallies, and the current RSI reading 72.68 does not deter us from being long gold.

Prior to breaking the $1033 major resistance with a follow through to over $1200, gold broke the $720 mark which was previously another major resistance.  From $720 gold subsequently rallied to $1033, a move of over 40%.  Gold made another 40% move when it surged through the $500 barrier to $720.  

One may infer from these observations that we are presently likely to get another 40% move.  

Considering the breakage of the $1033 resistance area, this gives us a gold price for the present move of $1446.20.  This is a rough estimate but it would not be unreasonable to expect gold prices to move up towards $1400/ounce during this major rally, and then when one factors in the possibility that these large moves could become even larger than 40% as the gold bull market progresses and becomes more volatile, prices higher than $1400 appear possible.

We normally look to the ultimate inverse gold price indicator, the US dollar, for more clues on what gold prices might do and when.  But since gold and the USD have recently been moving up together, this analysis technique isn’t too helpful.  However, investors should not lose faith in the gold bull market simply because this inverse relationship hasn’t worked recently. 

One should keep in mind that in the last gold bull market, gold and the US dollar moved up together, so it is likely that this could happen again.  Also, the fact that gold is rallying in spite of USD gains is a sign of great strength in the yellow metal. 

We think that in the long term, as the USD resumes its bear market down trend, gold prices will continue to move higher.  In the shorter term we believe that if the Euro should find its footing and begin to rise, as a result of perceived improvement in the sovereign debt issues in Europe, the USD will drop back slightly and gold price will likely take a hit.  For now, gold has become a safe haven investment sparked by unstable conditions in Europe.  

An improvement in European debt conditions would likely take away some of the premium presently given to gold.  However, if this should occur we expect gold’s price decline to only be temporary, since USD weakness will ultimately drive gold prices higher.  Essentially this could work out as a win-win situation for gold, albeit with the second win scenario of EURO improvement slightly delaying gold’s rise.

The bottom line is that the major rally beginning with the break out above the previous all time high of $1033 is not over yet.  We will likely see $1300 plus very soon.  And, we believe that gold did not recently break above its December 2009 high of $1225 just to rally to $1249.  There is more to come! 

As we are now trading at all time highs, we are in unchartered waters.  Volatility should be expected, and in large doses.  Short term, gold could drop back to $1185.  Ideally, however, we would like prices to consolidate at these current levels so that $1225 will become a support level and a base for the next move up. 

Written By Sam Kirtley From SK Options Trading

Investors have turned to gold ETFs as a safe haven during the recent stock market turmoil.  They offer a great way to protect you against risk in your portfolio during uncertain times. We have put together some other ETF options for your viewing below including some inverse gold ETFs for you to take a look at:      

LONG:           

The investment SPDR Gold ETF (NYSE: GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.           

The investment ETF (NYSE: GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.           

The Funds ETF (NYSE: GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”           

The objective of ETF (NYSE: SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.           

The investment ETF (NYSE: UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.           

The investment ETF (NYSE: DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.           

The investment ETF (NYSE: DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.           

The objective ETF (NYSE: IAU) of the trust is for the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust’s expenses and liabilities. The trust is not actively managed. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.           

SHORT:           

The investment ETF (NYSE: DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.           

The investment ETF (NYSE: GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.

Related posts:

1. Gold Investing: Why Bigger Isn’t Always Better Among Gold ETFs (GLD, IAU, SGOL, DGL, GDX)
2. Gold Trading: Physically-Backed Gold ETFs Provide Convenience For Investors (GLD, IAU, SGOL, PHYS)
3. Gold Investors: What The Heck Happened To Gold? (GLD, SGOL, IAU, UUP, FXE)
4. Technical Analysts Say Gold is At a Bargain (GLD, IAU, SGOL, AGOL)
5. Gold Outlook for Q4: Buy or Beware? (GLD, IAU, SGOL, AGOL)

NYSE:DZZ, NYSE:GLD, SGOL