TREND-CHANNEL

My Problem With Gold

04/06/09 09:22:18 AM

by Koos van der Merwe

With the world in recession, common belief is that investors should flock to gold to protect their wealth. Research suggests otherwise.

Security: GLDL
Position: Sell

With gold exchange traded funds (ETFs) available, buying physical gold and hiding it under your mattress is a thing of the past. Is this correct thing to do? Is gold on the way up? Figure 1 suggests otherwise.

FIGURE 1: GOLD, WEEKLY. This chart of weekly gold shows trend channels.

Graphic provided by: AdvancedGET.

Figure 1 is a weekly chart of the gold price and shows how gold rose from a low of $255 per ounce in 1999 to a high of $1,004 per oz. by February 2008. My Elliott wave count suggests that the count was a five-impulse wave up, and retracement from that date is an AB correction with wave C still to come. Drawing trendlines from the low as shown, we can see how the low of wave B was on the trendline drawn parallel from the top of wave 3. The relative strength index (RSI) has given a divergence sell signal, and the chart suggests that the low of wave C should be somewhere between 548 and 715, the range of the fourth wave of lesser degree.

With a predicted drop in the gold price, does this mean that money will move from gold back into the stock market? Probably. Gold does not pay a dividend. It is purely a capital gain play? As the market starts recovering, money will move back into those stocks that have been heavily oversold, especially.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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My Problem With Gold

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