Trade Rationale 03/20/2009
Fundamental Take:
The Federal Reserve has adopted a weak dollar policy to fight the US recession. The massive increase in the money supply will likely spur hyperinflation down the road not seen since the 1970s. The Fed seems to have a new fix out every month never giving the previous policy the time needed to impact the economy. In turn, the Fed has pushed short-term interest rates near zero printing an unprecedented amount of money in an unbelievably short time. Gold has long been seen as the best inflation hedge and best store of value against falling currencies. Wednesday's actions by the Fed included buying $300 billion in long-term Treasuries to bring down long-term rates. In total, an additional $1.15 trillion will be printed by the Fed. These actions give further credence to the inflation argument.
Technical Take:
Gold broke out of a high level consolidation in September of 2007 making a $300 move to $1,000 an ounce. The commodity bubble then popped as global growth slowed and the dollar became the safe haven currency pushing commodity prices lower. Gold, one of the strongest commodities, pulled-in for a successful retest of the previous breakout. Early 2009 saw a powerful breakout from a descending trendline along 3 lower highs. The breakout led to a retest of the all-time highs at $1,000 and yet another pull-in. This pull-in restested the latest breakout area and then had a strong move higher on high volume after the Fed's Wednesday FOMC policy statement release. The technicals now offer a good risk-to-reward area to enter gold.
Buy gold through the exchange-traded fund, GLD. Long at $94 or below placing stops at $86 for a max loss of 8%. Look for a break of the $100 level and a move to much higher prices.
Weekly logarithmic 3-year chart:
Daily 1-year arithmetic chart:
This trade is not a recommendation of a buy or sell transaction. The trade may or may not be entered by TWS Investments. This website is not intended as an advisory service.
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