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Investor demand for gold plunged 56 per cent year-on-year in the third quarter, according to the World Gold Council.

Ian Barrett/The Globe and Mail

Hi Lou,

Do you think the American dollar and therefore economy will collapse? If so, should I be buying gold and silver?

Thanks,

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Marty

Hey Marty,

Thanks for the assignment.

This will be the second time that I inquire as to the market potential for gold and silver. The last time was on June 26, 2013, when gold was trading for $1,276.50 and silver was priced at $19.52. Sue wanted to know how to proceed with her purchases and it was advised that both of the metals were taking the whip.

The charts indicated that price of the commodities were failing to hold support at any level. The analysis conducted on Sue's behalf did identify that seasonal factors were coming into play which could set up a trade. However it was advised not to expect a return to the 2011 highs in the short term.

It turned out to be the right call. The price of the metals caught a bounce in July of 2013 but then retested the lows for the year.

Regarding your concern about the U.S. dollar and the collapse of their economy, I would have to say your view is extreme. The greenback is the vehicle and reserve currency of the world and as such the global community has an interest in seeing reasonable stability. That doesn't mean that it won't trade lower and has over the last 44 years. In 1970 I could get on a subway in NYC for $0.30 today it costs $2.50. Inflation has and will continue to be a part of our future economic future.

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You asked if you should buy gold and silver and I would say that they should be part of diversified portfolio. How big a part depends on the investor profile of each individual.

Another analysis of the metals will assist you in deciding how to proceed.

The three-year chart for the U.S. dollar index indicates that we have a death cross to deal with and resistance that has surfaced along the 200-day moving average. It appears that we on trend to retest support at 79.00. If it retested the 2011 lows near 73 then you could see gold and silver move back towards their all-time highs.

The three-year chart for gold demonstrates that the downtrend that has been in place since October of 2012 has been broken and that we could be about to see a golden cross form.

The six-month chart for gold depicts the buy signal generated by the MACD and the RSI in December of 2013 when the price of an ounce of gold was trading near $1,200 an ounce. The advance has taken gold through the 50- and 200-day moving averages and is currently building a base at $1,340.00.

The three-year chart for silver indicates that it is trailing the movement in gold. The downtrend that started in October of 2012 is being tested but not quite breached yet. The advance that started in February of 2014 has broken above the 50- and 200-day moving averages and, like gold, a golden cross looks about to form.

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From the analysis conducted on your behalf it would seem that now would be a good time to begin accumulating your position. Don't jump in all at once but rather pick away to build your position.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lou@happycapitalism.com.

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