The Golden Bears Are Wrong.

by DAN I think the gold bears might be missing something. The reason gold is making all the news now is because it is breaking above $1,000. If our numerical system were an 11-digit system rather than 10, then this new move above $1,000 wouldn’t be as interesting or noteworthy as a move above $1,100.

What is more meaningful to me is that gold is breaking above resistance that is nearly 2 years old. In essence, the move is reaffirming the multi-year uptrend and is rejecting the bearish view. [Speculators can push prices lower too, so the “it’s just speculation” argument doesn’t really move me.] But it’s the breakout above resistance that matters, not the number associated with resistance. If this multi-year resistance was at $950, then I’d have gotten excited at $960. But it is at ~$1,000.

Gold peaked in March of 2008. Since that time, it has declined to test the 2006-2007 resistance at around $680-$690. The bulls passed that test and have been pushing this commodity higher ever since in a series of higher lows. It is the series of higher lows that provides more strength for a further push by the bulls because the average cost basis of short-term traders (i.e., the ones who really move the market) is relatively high. There is no widespread temptation to take profits when the very reason you’ve been holding gold is just starting to happen.

So I remain bullish on gold. While I remain the minority in Columnist Conversation, I also naively continue to believe that the rise in gold is forecasting inflation. Like Nostradamus, this forecast may take some time to play out, but it is coming. Also, as our debt burden starts to weigh the economy down (we can print all the money we want, but it still isn’t free), our weak dollar just might result in an increasing cost of goods accompanied by a stagnating economy. Yes, the “S word.”

Looking forward, gold matters and it matters a lot. It just doesn’t matter right now because there is no sign of inflation. But there never is…until there is.

Disclosure: I am long gold American Eagle coins, TCK and GDX (though my positions can change at any time).

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