Gold’s About To Burst Out Of Its Recent Range

My friend Kevin just regaled me with a story about his trip to the mall - a guy was there handing out plastic bags for people to use to turn in their gold for cash. “Holy cow!” Kevin said. “It was like a mobile pawn shop.”

Kevin resisted the urge to run home, find his gold and sell it to the plastic-bagger at the mall. You see, Kevin is a smart cookie and knows a thing or two about gold. He’s a buyer, not a seller, of gold coins.

Gold is approaching an inflection point that could be good for gold owners, like Kevin. And it could be good for gold traders, too! I want to tell you about that today.

And while I’m at it, I’m going to give you tips on how to sell your gold - if that’s still what you want to do.

But first, why …

Gold is About to Break Out Of Its Recent Range

Let’s look at a chart of gold as tracked by the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust (GLD) …

This daily chart shows that gold has been in an intermediate uptrend since November. But it peaked out last month and went into a short-term downtrend. The GLD is now below its 20-day moving average, which is a quick-and-dirty dividing line that can tell you if the trend is up or down.

Now we need to wait and see which way gold goes …

If the GLD bounces higher from this inflection point and goes up to break the short-term downtrend, great! You can buy the GLD or a fund like the PowerShares DB Gold Double Long ETN (DGP), which is meant to deliver twice the daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return, to ride that move higher.

On the other hand, if the GLD breaks the uptrend, you can go short with a fund like the PowerShares DB Gold Double Short ETN (DZZ). This ETF is designed to replicate twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return. In other words, for each 10 percent drop in the underlying gold index, the DZZ could jump 20 percent.

But a word of caution: Leveraged funds, like DGP and DZZ, aren’t for buying and holding - they’re for short-term trading. And losses can pile up twice as fast if the price of gold goes against you.

Of course, if gold does drop lower, you might simply consider that a chance to buy gold on the cheap.

Why is that? First, I have to give you some background …

Gold Collectors, Investors, and Speculators Buying Like Crazy …

Last week, the United States Mint officially announced the suspension of another slate of gold and silver products. The mint is suspending its 2009 American Gold and Silver Eagle proof and uncirculated coins produced for collectors. These collectible versions of the bullion coins represent a sizeable amount of precious metal sales to individuals.

The Mint is still making gold bullion coins, but quantities are limited.

And no wonder: The U.S. Mint sold four times as many American Gold Eagle coins in January 2009 as it did in the same month a year ago. This is following the trend established last year when sales of the Mint’s one-ounce American Eagle gold bullion coins rocketed to 710,000 ounces, up from 140,000 ounces a year before!

And it’s not just the U.S. Mint that has seen gold coin sales soar …

The Royal Canadian Mint, which produces Maple Leaf bullion coins, said it quadrupled its production capacity late last year as demand for gold and silver bullion products shot up.

Recently we saw the holdings of GLD, hit a record 1,056 metric tonnes on March 15. That’s more than the gold held by the Swiss government! And other ETFs around the world are adding to their holdings as well.

Take a look at this one-year chart from Sharelynx.com …

This chart shows that the rise in ETF holdings of gold has been extraordinary in just one year - from 38 million ounces of gold to 60 million ounces of gold.

So why does this translate into a tremendous opportunity for you to buy gold?

Well, you have to remember that a big chunk of the money in gold-based ETFs is speculative money. Investors are using these funds to ride the rise in gold prices. If gold and the ETFs break their uptrend, we’ll probably see speculators sell their holdings, which should drive the price of gold down rather quickly. And that, in turn, should push down the price of the American Gold Eagles that are on the market.

So if you’ve been looking for an opportunity to pick up American Gold Eagle coins on the cheap, this could be your best chance for years to come.

A pullback on gold prices to between $850 and $800 an ounce would not surprise me. Remember though, dealers are getting hefty premiums on bullion right now, so you’ll have to figure that in your cost. Plus, if you’re buying from a Web site, you’ll have to add mailing costs.

So, would a break of this uptrend in gold prices worry me? Not much. I believe that a pullback is fine - a normal and necessary part of any bull market.

Take a look at this monthly chart of gold prices …

You can see that gold has a long way to go before testing its longer-term uptrends.

And if gold bounces and heads higher from here, you can pile in to the gold ETFs. Either way, you can win!

Now, if You Still Want To Sell Your Physical Gold …

A friend of mine in the business can’t keep Gold Eagles in stock. But he has plenty of inherited jewelry that’s being turned in all the time, having outlived the lifespan of anyone who ever thought it was pretty.

And here are three pointers he told me that gold sellers need to know …

#1) The price you get varies widely.

* Independent buyers who sell directly to a refinery can pay the most - up to 70 percent of the melt (spot) price of gold.

Gold dealers will pay you about 50 percent of the melt price.

* Pawn shops will pay you the next level - a good one will pay 40 percent to 50 percent of the melt price.

In my experience, the firms that advertise on TV will pay you the least. The average is about 33 percent, or 33 cents on the dollar. I’ve even heard of people getting as little as 10 cents on the dollar!

And I’d wager that the guys who hand you a plastic bag in the mall and offer to buy your gold probably pay about the same as the TV pitchmen.

#2) You should know exactly how much gold you have. Some companies don’t even tell you how they based the amount they give you! And if you don’t know the weight, you have no idea what kind of a deal you’re getting. But it’s hard for people to know exactly how much gold they have since most gold jewelry is not 24 karat (pure) gold. That’s because pure gold scratches and dents easily and is more expensive, so jewelers combine it with other metals.

For example, if you know you have 18 karat gold, that’s 75 percent pure gold. If your 18 karat gold necklace weighs one ounce, and gold is trading at $900 an ounce, that’s $900 x .75 or $675 worth of gold at the melt price. If someone says they’re giving you 70 percent of the melt price, they should pay you $675 x .70 = $472.50.

The lesson here: Bring your own calculator and do your own math. If you have the time, have your gold jewelry appraised at more than one place and write down which pieces are 18 karat, 22 karat, 14 karat, etc, and their weights.

And when it comes to weights, here’s something else you should understand: Gold is measured in troy ounces - 12 troy ounces to a troy pound. If you go to a jeweler, he might use pennyweights. There are 20 pennyweights in a troy ounce.

There are also 31.1 grams in an ounce of gold. Notice this is different from the grams you use in food. So if you have a food scale at home, it probably uses 28 grams per ounce.

It can be a bit confusing if you’re not used to the system. So, it’s best to have your gold weighed by a trusted source.

#3) Sell when prices are going up. You’re likely to get the best deal from a buyer if he thinks he can sell your gold at a higher price.

These three simple tips should help you get the best price for your gold jewelry. But as far as investing goes, my suggestion is to be a buyer on pullbacks. And when it comes to trading, you can go long or short, since there’s money to be made on either side.

To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive.

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Comment by Dave

2009-03-21 19:09:54

Sean - you bring up some good info, but you also paint Mall based gold buyers with a wide brush and assume “facts” that are not actually true when you said

“And I’d wager that the guys who hand you a plastic bag in the mall and offer to buy your gold probably pay about the same as the TV pitchmen”

The company I work with (Gold Buyers at the Mall) has a direct relationship with their refinery and is not passing the purchased items through a middleman…

Just wanted you and your readers to know that there is at least one very competent and competitive Gold Buyer at the Mall. Our testimonials page is full of real life people giving their experience.

Thanks for the good article - I think everyone should be buying and holding investment grade gold (coins, bars, etc) but holding on to broken jewelry as an investment is not a sound strategy…

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Comment by Alexia from USellGold

2009-04-07 17:32:30

You have to be careful of plenty of scams with gold buying services. The TV Pitchmen you refer to sometimes do pay out the least amount, unless you call and complain. Then they often go from offering you 10 cents on the dollar to 50 or more.

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