As gold completes its metamorphosis from a precious metal to portfolio diversifier and now to a de-facto currency, the mega-bull continues to stampede. While in classical terms gold is referred to as a precious metal, it always has been seen as a unit of money. The advent of exchange-traded funds (ETFs) and index funds has solidified gold as an asset class and de-facto currency as investors worldwide grow more skeptical of fiat currencies.
The usual suspects can be blamed for the steady rise in gold over the past 10 years: Geopolitical risk, falling U.S. dollar, low interest rates, massive sovereign debt plus the wildcard "off balance sheet" accounting items. These factors have created the perfect storm for the shiny mineral to thrive.
Gold has rallied 29% year-over-year as of March 31 closing prices and 116% from its October 2008 correction low.
Gold has consolidated and built a good base at $1,400. The 20-week simple moving average has provided guidance and shown solid support in the event of a correction. Gold has breeched this support level several times, but only marginally before resuming its climb. The chances of a larger correction are low as the U.S. dollar is in the process of testing new lows and the global credit crisis, which provided support for the dollar, appears to be mitigating.
Using the move from the October 2008 lows to the April 4 closing price as a base, a 38% extension would equate to a gold price of $1,774.50. With the current geopolitical landscape and the lack of confidence in the U.S. dollar and other fiat currencies, this level easily could be attained.
There will be strong resistance at $1,500, which could present the impetus for a pull-back if it fails. This would set up for a test of support levels at $1,425 and $1,400. These levels should represent good value for the traders who are looking to buy the breaks and be supported by the 20-week moving average and the overall trendline.
Charles Nedoss is senior market strategist for Olympus Futures Inc.