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As Policymakers Stumble, Gold ETF Will Remain a Profitable Trade

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The government is scrambling to resolve the debt ceiling debate, and precious metals could reap the benefits.

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Yesterday morning Fed Chairman Ben Bernanke met with members of Congress again. I think Congress heard not what they wanted to hear but instead they heard what Dr. Bernanke actually said. I listened to him both on Wednesday and yesterday, and he sang the same song. He once again emphasized that overzealous cuts to government spending in the short term could derail an already fragile recovery.

Dr. Bernanke also said that the FOMC is not currently ready to embark on a third round of quantitative easing or government bond buying to stimulate the economy.

Late on Wednesday Moody's warned that the US would lose its top credit rating if a compromise on the debt ceiling was not resolved. Standard and Poor's also told US lawmakers and business groups that it would cut the credit rating if the government fails to make any of its expected payments on debt or other obligations. To further emphasize the point China, the biggest foreign creditor, urged the US government to adopt responsible policies to protect investors' interests.

Dr. Bernanke further amplified the warning that a debt default would be a calamitous outcome creating a severe financial shock that would have effects not only on the US economy, but would ripple throughout the globe.

The Wall Street Journal reported that Speaker of the House Boehner was quoted as saying "we are in the foxholes" fighting for the people of America. Perhaps he forgot to mention that he has previously voted to raise the debt ceiling five times and this game he is playing is nothing more than the new national pastime of Congress called "Brinksmanship." It is partisan politics in its most unseemly form and as middle class Americans suffer he had the audacity to say that he was in the foxholes.

As soon as the words came out of Dr. Bernanke's mouth that the FOMC was not ready to institute another round of quantitative easing at this point the market dropped like a hot potato. Gold, which was humming merrily at $1590.00 on its way to the key $1600.00 level, sold off a bit and closed the session at 1586.40. To use the Gold ETF (GLD) as a proxy it closed up ½% at 154.54. Not too bad in a market that closed down 54.49 points on the Dow.

So this begs the question, how far can GLD run? Last January I had it pegged to go to 160, which I believe it will easily reach unless there is a complete meltdown in the market. However, as it now seems to have worked its way up so slowly and steadily, I see $170 as a realistic goal. Please see the chart below.


Click to enlarge

A careful study of this chart will show that when GLD has corrected it has pulled back to the 150-day moving average. The time to sell will be when it gets above 70 on the RSI. While a number above 70 is overbought with a very emotional trade like gold, 80 would be the place to start taking profits. If you remember the parabolic silver run up in the last week of April, SLV did not correct until the RSI was at 90. The more emotional the trade the higher the RSI number seems to get because the herd mentality has removed all reason from it.

So in conclusion, unless all reason is restored to Congress, which I see as the least likely scenario to play out, we can expect gold to continue its undaunted run up. Once you sell, wait for a correction back to the $141.50 area before reopening the trade. As long as governments continue to debase currencies, gold and its baby brother silver will remain a profitable trade.
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No positions in stocks mentioned.
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