Gold Prices: Making Sense of the 'Death Cross'

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"This isn't hard to understand when you consider that the dollar and gold have an inverse relationship. If one rises, the other traditionally falls. I don't expect that to last much longer."

Gold prices have tumbled 16% since last summer and, more recently, suffered a "death cross" leading many investors to question whether or not gold's bubble has popped.

If you're not familiar with the term, a death cross is what it's called when the 50-day moving average of the price of a traded instrument—in this case gold—crosses the 200-day moving average from above.

I disagree.

I think that the 16% drop since last September is simply based on a corresponding decrease in speculative interest at a time when the dollar has become the best looking horse in the glue factory.

Traders are simply moving currencies as the euro comes apart.

This isn't hard to understand when you consider that the dollar and gold have an inverse relationship. If one rises, the other traditionally falls.

I don't expect that to last much longer.

In fact, I see gold rocketing out of the basement after it consolidates, having broken $1500. By then, the euro may well have achieved parity with the dollar, leading central bankers to print money on a scale that we can't imagine today.

When that happens, traders will no longer be as concerned with the relative shift in currencies as they will be with protecting the wealth those currencies supposedly represented.

Here's the key takeaway: Don't view gold as a speculative play - that's the mistake many traders are making right now - but, rather as a hedge against the wealth destruction additional bailouts will bring.

Take advantage of the relative lull in gold prices now to make sure your holdings "add up." The ideal relationship is 10:1 with your bonds, meaning that for every $10 you have invested in bonds, make sure you've got $1 invested in gold.

I suggest some gold-related investments for my subscribers, but depending on your preference for hard assets, you may prefer bullion, jewelry, or even mint certificates.

Keith Fitz-Gerald
Money Morning

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