Ben Bernanke’s Words Are Gold

Written by Goldfinger

I wrote recently that I had exited the metals market while I watched the correction.  I am not a buy and hold person anymore – it is too dangerous.  Let’s take a look at my 4 favorite metals over the last 2 years.   [hat tip to Yahoo Finance for chart below]

Gold (GLD) SPDR Gold Trust, Silver (SLV) iShares Silver Trust, Platinum (PPLT) ETFS Physical Platinum Shares, and Palladium (PALL) ETFS Physical Palladium have done OK except for Palladium.  If you bought and held for 5 years you would be ahead of the S & P 500 except for PPLT, but if you managed to sidestep some of the steeper drops and get back in before it goes back up, the results could be considerably increased.  Here are some hints to help you do this.

There are usually a few signs of change.  The Moving Average Convergence-Divergence (MACD) indicator is a simple and effective momentum indicator.  The MACD turns two trend-following indicators into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, center-line crossovers and divergences to generate signals.  Thanks to StockCharts.Com for the chart below and the explanation.

Another simple way is to read the investment news and figure out what it means for your investments.  For instance, Ben Bernanke spoke today (3/26/12) about the jobs market being weak and that interest rates need to be kept low.  Many pundits read into this that QE3 is on the way.  The stock market took off and so did the metals because QE3 means inflation.  Every time Bernanke seems to speak, the metals markets react positively or negatively.  The more pessimistic the speech, the better for metals.

Another chart to watch is volume.  If stocks are going up on big volume you can feel relatively safe, but if only a few stocks are going up and the volume is weak I would be watching for a change downward.  Conversely, if you have big volume on a downward move I would be concerned.  Below, you can see on the 1 year chart for GLD, how the volume can vary.

The Bollinger Chart below is a more sophisticated way to combine a lot of information in a chart.  Bollinger Bands reflect direction and volatility. Technically, prices are relatively high when above the upper band, and relatively low when below the lower band.  Prices are high or low for a reason. Bollinger Bands are not meant to be used as a stand alone tool and you need to understand how they work before incorporating them in your strategy as well as incorporating other indicators to reach a conclusion.

The chart above also shows a 20 day moving average.  There are many moving averages used by chartists.  The 20 day, 50 day, 200 day etc.  Basically, if the price of the stock moves across the moving average it is considered a momentum changer.  A move to the upper band shows strength, while a sharp move to the lower band shows weakness.   The 20 day SMA (simple moving average) line can act as a support line for the stock and quite possibly a good place to buy.  Currently GLD is below the 50 and 200 day SMA.  Not a good sign. 

I am still on the sidelines waiting for a sign I should jump back in.  I find the chartists approach as inconclusive to provide any support for short term trends – and the only real trigger for big movements is Federal Reserve Ben Bernanke’s words.