Gold has Begun a new Move to the Upside

By David Levenstein   Oct 13 2009 10:02AM

Only last week it seemed as if gold was stuck in a trading range between $990 and $1020. Then suddenly it shot up to the $1050 level. When the Australian unemployment figures were released, they were much better than market expectations. This resulted in a strong rally in the AUD and gold reacted to the upside. Later in the week, when the U.S. Labor Department reported U.S. Initial jobless claims fell  33, 000 to 521,000 in the week ended Oct. 3, and when the ECB president commented on the importance of a strong dollar, the EUR dropped against the USD to reach 1.4725, dragging down gold.

As the EUR recovered against the greenback to eventually trade above 1.4800, opportunity buying helped push the price of the yellow metal back to $1060. But, by the end of the week it settled down around the $1050 level. Nevertheless, during the week, we saw gold make new historical highs, and the beak above $1020 has now established some new support levels above the $1000 level.

Now, various analysts are predicting much higher prices. For example, Citigroup says gold could rise above $2,000 next year. According to an internal client note the US bank stated that gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity. Barclays Capital predicted that the gold price could rise as high as $1,500/oz. The bank is targeting $1,050/oz initially, followed by $1,120/oz. It advises holding long positions in the precious metal.

The gold price is still significantly below its inflation-adjusted high. The price hit $850/oz in January 1980, which represents a price today of about $2,300/oz when adjusted for inflation.

Higher prices are nothing new for me, as I have consistently stated that I believe gold is in a huge bull-market that has many more years to go before peaking. And, although the price of gold can be volatile in the short-term, the yellow metal has maintained its value over the long-term, serving as a hedge against the erosion of the purchasing power of paper money.

Gold should be an important part of a diversified investment portfolio and investors should accumulate a holding of bullion. However, over the last few weeks, gold has offered traders some great opportunities. But, it is important to understand the difference between trading and investing.

You must bear in mind trading is not investing. Trading is a short-term thing. You enter a position with the expectation of exiting it quickly. That can be anywhere from 30 seconds to 3 months depending on your strategy. Investing is a longer-term process, generally lasting years.

As a trader you want to use leveraged instruments such as gold futures. And as an investor you first need to build a core holding of bullion before investing in shares and a gold ETF. Of course there is nothing stopping you from being a trader and an investor, just as long as you understand the difference. And, never sell your core holding of bullion to use for trading.

Technicals

In my Gold Up-Date dated September 21, I wrote about the potential reverse Head and Shoulders pattern that was developing. I now believe that this pattern is real and using Fibonacci Extensions, my next target for gold is $1100. However, once that has been reached, there is much more upside for gold market and by using the H&S pattern, we can see that $1300 is a real possibility.

David Levenstein

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About the author: David Levenstein is a leading expert on investing in precious metals .He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He  He is also a regular commentator on www.kitco.com and www.mineweb.com  David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.z a

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.