Gold in a Bubble? Not Yet.
Solid Proof the Gold Market is Alive and Well
Evaldo Albuquerque, Editor, Exotic FX Alert
From 1998 to 2000, shares of a company named Inktomi Corp went up 1,900%. Then in 2000, this stock hit its all-time high of $231.62.
It had to be a great business, right? Wrong. Actually, the company never made a single dime in profits.
But regardless, investors kept buying. That shows you how irrational investors can get.
By 2002 that same stock was trading at a quarter. And that’s just one of many examples of tech companies that crashed after the tech bubble popped.
Just a few years later, investors had to deal with another bubble. House prices are still falling to this date. We’re still dealing with the fallout from that financial mess.
Now investors are obsessed with bubbles…
But I don’t blame them. After all, these two massive bubbles of the past decade decimated many investment accounts.
So investors are constantly seeking for “the next bubble.” Gold isn’t as easy to value as a company, so the yellow metal becomes a good bubble candidate.
In fact, after the recent correction in gold in the past week, when gold fell over 5% in just seven days, I heard many people saying the “gold bubble” had popped.
But as I will show you in this article, gold remains in a healthy bull market. And while I believe we will get a gold bubble, that day hasn’t arrived yet. So let me show you an easy way to tell when this gold bull market is truly at risk…
The Trend is Your Friend, Until It Isn’t
One of the easiest ways to tell when the bull market is really over is to simply watch gold’s price action.
If you want to ride this great bull market in gold until its end, the price will tell you when to get out of the world’s favorite precious metal.
Right now, the price is saying now is not the time.
Take a look at the weekly chart of gold below. Gold has been in an uptrend since 2001. You can see in the chart that gold entered into an upward channel early in 2008 (the pink shaded area on the chart below).
Every time gold has reached the top of that channel, it has had a small short-term correction. This is exactly what’s happening now.
So it’s too early to declare the end of the gold bull market. Gold will likely find a lot of buyers if it falls to the bottom of its trading channel.
After all, for the past three years, gold had big rallies every time it reached the bottom of that channel. There’s a big incentive for investors to buy more gold if it reaches that level again.
But there’s another area of strong demand that has worked even better in this bull market. It’s the 40 weeks moving average (red line in the chart). Notice that, with the exception of 2008, every time gold has touched that line, investors used that opportunity to buy more gold.
Right now, that moving average is trading around $1,500. I would load up the truck with gold if it reaches that price again.
Gold Continues to Climb Since 2008
The World’s Strongest Currency
Now that more people are realizing that gold acts like a currency, as a true store of value, the uptrend in gold has accelerated since the financial crisis of 2008.
Gold is simply benefiting from the crisis in the two most important fiat currencies in the world: the dollar and the euro.
These two currencies make up 87.3% of global forex reserves. That means central banks around the globe hold most of their assets in those two currencies.
But now there’s an ugly contest going on between those two major currencies. Nobody can tell which country’s problems are worse.
In Europe, the sovereign debt crisis is now spreading to big countries, such as Italy and Spain. Meanwhile, the U.S. seems to be heading to another recession, which will give the Federal Reserve reasons to print more money.
No wonder gold keeps marching higher. Gold is the alternative currency that rises when the two most traded currencies in the world suffer.
If this gold correction goes on, and gold continues to fall in the short-term, you will hear more people saying the bubble has popped. But that will actually be a good opportunity to buy, especially if it falls close to $1,500.
Bottom line: this gold bull market is nowhere near done yet. Be sure to take advantage of these lower prices as they come.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
P.S. As a currency trader, I watch gold prices closely to get clues about the overall market. Higher gold prices often mean that investors are buying up defensive currencies – and are concerned that the global market may be slowing down. Right now, we have that exact situation. Over the next few weeks, I’ll be looking for ways to profit off this global slowdown by shorting emerging market currencies in Exotic FX Alert. Click here to get a look at my next month’s worth of Exotic FX Alert research (and my best trading recommendations) for a single $1.
