Gold Rally?

I have heard an increasing number of "talking heads" in the media recommend investing in gold. You can track gold using $GOLD (it is end of day values, though) or invest in it through an Exchange Traded Fund, GLD. How can such recommendations in general be evaluated?

Many persons watching or listening to the "talking heads" of course just rush into recommended investments. After all, these people have been analyzing markets for years! But, as we have discussed in class, experience is a sufficient but not necessary condition for competency in a given field. Then there is consideration of the short term versus longer term. Technical analysis and economics can help with both of these. Although there are never any guarantees, just a higher probability of success based on systematic analysis, the benefit of this combination is that you can check to see where mistakes occurred after the fact and improve your economic analysis.

A further edge into this is provided by intermarket analysis. As we have already discussed in class, gold and the US Dollar tend to move in opposite directions, as gold and other commodities have prices stated in US Dollars. For extra credit, due at the beginning of class tomorrow (2/17), prepare a Word document were you paste a graph of $GOLD and the US Dollar Index in the same graph, converting each to line charts (from OHLC). Is the relationship between this pair that expected from intermatket analysis at present? Explain why or why not (write a few sentences to explain this), after reading about the recent behavior of each from sources on the Internet, etc. Then, in a separate graph (you can go back to OHLC), have both gold and the RSI(9) in the same chart and paste this into your document. What does the relationship betwen gold price and the RSI indiacate about any "legs" the short-term gold rally can be expected to have? Write a bried explanaton of your answer.

Finally, today Japan reported a quarterly (sequential) change in real GDP of over 3%! This translates into an annualized decline of around 13%. OUCH!! You can read about this. What did the Japanese Yen do in reaction to this? It actually rose, believe it or not! Clearly, this is yet another instance where "other things" are not equal.

As the semester progresses, think about how weakness in Japan will likely affect the global recovery (they are the #2 economy in the world), and how this might play into your forecast.