(By Greg Guenthner) Your reasons for owning gold don't matter to me. Maybe you want to use gold to protect yourself from the declining dollar. Or perhaps you believe foreign demand will increase prices. Either way, it's important to time your purchase in order to get the most out of the investment.
That's why I decided to write about gold today. If you're bullish on the yellow metal, right now could be a great opportunity to buy — whether you consider yourself a short-term trader or a longer-term investor.
Shortly after gold started to move higher in September, I told you about three new buying opportunities you could exploit before gold attempts to make new all-time highs. Despite its recent breakout, gold moved too far, too fast. That's why I thought you should wait for a better-timed entry, instead of getting caught chasing the price.
Here's what I wrote on Sept. 19:
"Gold is running out of gas as it approaches resistance at $1,800. It will probably need to rest or retrace before attacking $1,800…If and when a pullback occurs, give gold several days to a couple of weeks to move down and/or sideways. Eventually, the price will tell you where and when support will be. Once gold moves higher from its new support level, you will have found your low-risk entry point. If I had to guess right now, I would say you might have an opportunity to buy near $1,725…"
Let's turn to a chart to see how this idea is playing out:
Gold indeed turned back at $1,800. As you can see from our momentum gauge under the price chart, we were given clear indication that overbought conditions would probably cause the spot price to drop (red arrow).
Now that gold has had the chance to blow off some steam, we can see a potential buy price right at our original guesstimate: $1,725. In the above chart, I added a 50-day moving average in blue to supplement the horizontal support/resistance annotations. As I type, the spot price is rallying higher after tagging the 50-day moving average. That's great news for gold bulls — and a sufficient low-risk entry if you've been looking for the right time to make your move.
For shorter-term traders, you can feel confident that the bounce is intact as long as the spot price continues to respect the rising moving average. If you're a longer-term investor, you might want to opt to use recent lows near $1,550 as your sell signal.
Looking ahead, it's important to keep an eye on the performance of stocks to guide your gold trades. While it's true that gold has outperformed the S&P 500 over the past three-plus years, the two have essentially traded in the same direction, with the exception of the late 2011 correction:
The arrows mark where stocks and gold diverged. However, as of the beginning of 2012, the relationship returned to "normal" for the time being. If the gold and stocks' relationship remains intact, the yellow metal could correct with the stock market. If you're thinking about making a buy right now, you need to respect the possibility that slumping stocks could drag gold down with them. Only time will tell.
Trade your plan — and always have a stop loss in mind. It doesn't' matter what your investing time frame is, you must be prepared in case the market moves against you. After all, you can always buy back a position at lower prices if the market gives you the opportunity.