THE VIRTUS VIEW

Although there are many reasons investors take a position in an investment, there are really two primary methods to evaluate a particular asset; fundamental and/or technical analysis. I want to discuss Gold in this Virtus View because it has been in the news a lot lately and has made a move up here recently. Gold and metals/commodities in general trade on technical analyses more than stocks, and a technical break out appears to be why gold is on the move right now.

 

As we have discussed in the Virtus View before, the simplest of technical analysis is the trend of a particular investment. Many experts refer to this as the higher highs and higher lows or vice versa of an investment. So if we take a look at the S&P 500 in Chart 1 for the last 6 months, you will see the trend is up and we continue to make higher highs and higher lows, with the exception of one little correction in the summer (which is why your investment horizon is so important in both fundamental and technical analysis).

 

Chart 1

 

Obviously, when stocks are moving down it looks just the opposite and has lower highs and lower lows.

 

Sometimes though, an investment will go through a compression phase where it makes lower highs and higher lows over several months. This is called a pennant or triangle, depending on the previous movement of the investment. Let’s take a look at GLD, the ETF that closes tracks the price of gold.

 

You can see why they call it a triangle or pennant. When an investment is compressing or consolidating like this, historically when it breaks the triangle it moves significantly to the side it breaks. As I said above, since commodities, including metals, are traded based on technical analysis, moves like this can generate a lot of volume, which in turn makes it way into the news.

 

But back to the chart, GLD broke upside at around $94.50 and has moved up nicely since. I believe this is a major reason for the gold movement recently. Keep in mind; the fundamental reasons to invest in gold are fears of inflation and to profit from the falling dollar. Not many experts fear inflation on a short-term basis and interesting enough, the dollar broke out on the downside of a triangle at the same time gold broke to the upside.

As for the market, many analysts including myself have looked for a correction since the S&P 500 is up approximately 55% since the low of March 9, 2009.   Not since the 1930s have we seen a short-term rally like that. The difference is the market in the 1930s fell 90% prior to the rally of 100% that followed. With that said, the important metric from my view is the fundamental analysis. Since the market is currently trading at an approximate P/E of 15 for next year’s earnings projection (source Standard and Poor’s), I feel it is fairly valued. So, bottom line, it just depends on how much risk an investor wants to take.

 

Feel free to call Amy and schedule a meeting if you would like to discuss any of this information further. 

 

Don’t forget to listen to my radio show, airing every Saturday on CNN 1190 radio (am) from 4:00 to 5:00 pm. We also have previous shows on the website: http://www.virtuswealth.com/radio.aspx . The September 12th show focuses on gold and metals. Please visit the website if you want to check out the discussion with Kevin Cook, an expert on Gold and other precious metals. This week’s show will have Bill Griffin, local Real Estate Broker.

 

 

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