In our December 7th, 2007 issue we went bullish gold. By way of the ETF GLD we got in at $79.60. Currently it is right around $87. So to help our subscribers and potential subscribers understand our trade process we felt it would be helpful to walk you through this trade.
We look for potential trades fundamentally and trade them technically. As we have mentioned before technical analysis helps us define our risk vs. reward and makes our trading more objective. We like to think we get the best of both worlds.
Fundamentally there are several things that are bullish for gold and precious metals in general.
-Negative real rates. When inflation adjusted rates are negative you want your money in real assets.
-Falling US Dollar. If the US Dollar is declining in value relative to almost anything you want your money in other currencies. While we don’t necessarily think we need to be back on the gold standard, we do see gold as an alternative currency.
-Rising Swiss Franc. Historically when the Swiss Franc is rising it means that investors are putting their money in a safe haven currency. The correlations between gold and the Swiss Franc have held over the long term due to many of the same reasons.
-Rising Inflation. Again if your money is devaluing you want to put it somewhere else.
These are but a few of the reasons that we have been bullish gold. After we have a fundamental reason to go long or go short as the case may be we then look for a catalyst. That catalyst can come in many ways. Sometimes it is an actual economic number, a chart pattern, or any number of things. In this case it was a textbook example of a triangle consolidation.
As we have posted before we are huge proponents of risk management. We have found that for us technical analysis is one of the big pieces of the puzzle. Using charts we are able to define entry and exit points in an objective way. Some may disagree with us but we have found charts to be invaluable. In the case of gold we had wanted to get long for a while but it was overextended. Well patience paid off because it pulled back and consolidated and formed a strong triangle. We placed it in our newsletter and that same week we got in at $79.60. As of tonights close it is at $86.50 and our current stop is at $84.38
The Macro Trader
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