This Gold Investment Could Gain More Than 35%

Gold has gone nowhere for months, but I think it is about to make a big move. And I have an investment for you that will allow you to profit double gold’s move.

Many traders have strong opinions about gold. Some argue that it is the ultimate inflation hedge and a vital part of any balanced portfolio. Others believe it is a worthless metal. This is the view that Warren Buffett colorfully took in his most recent shareholder letter.

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Buffett pointed out that if you put all the gold in the world into a cube, each side of that cube would measure about 68 feet across. You could then drop that cube into an area that’s smaller than the infield of a baseball field.

Now you would have a valuable cube, worth about $10 trillion at recent market prices, but Buffett added that your golden cube would produce nothing in the future — no interest, no dividends, no earnings.

Instead of a gold cube, Buffett said you could take that $10 trillion and buy all of the farmland in America for $400 billion, plus 16 companies with a market cap equal to Exxon Mobil (NYSE: XOM), and still have more than $1 trillion in cash. Over the next hundred years, these investments will deliver trillions of dollars in earnings.

Buffett’s logic is hard to argue with. Gold has no value other than what a trader is willing to pay for it. And right now, the chart says traders are not willing to pay a higher price for gold. Maybe they prefer to buy farmland instead to take advantage of record-high grain prices. Or perhaps they want to own large-cap stocks. The chart doesn’t tell us what they are buying, it just tells us that now is a great time to short gold.

Since reaching a high of $185.85 in September 2011, the SPDR Gold Trust (NYSE: GLD) has been forming a descending triangle. The downsloping trendline from the September high shows the general direction of the trend, and the bottom of the triangle defines support near $150 a share.

GLD Chart

Since May, GLD has been confined to a very narrow trading range. The bulls might argue that the support is holding and an upside breakout is coming. I believe the stronger argument is that the bulls cannot push prices up and support will break very soon. Every time a rally has started, it has been brief and the price has been unable to move much above $150. That shows us there are more sellers on rallies, which is bearish for GLD.

The descending triangle is an obvious pattern on the chart, and many traders have noticed it. When it breaks, panic could set in, in which case, selling will quickly push the price of GLD down to the target at about $115. This target is the difference between the top of the triangle and the base, subtracted from the base.

This would be a major move in gold, and while it might seem unrealistic for gold to fall to about $1,150 an ounce, big moves are normal in this volatile commodity.

Fundamentally gold has no value, as Buffett so wonderfully explained, and it trades largely as an inflation hedge. Inflation has been low for years, and fears over an inflation spike because of the drought seem overblown. Food accounts for less than 8% of the U.S. Consumer Price Index, and even a doubling of grain prices will have only a small impact on overall inflation. Consumers in other countries spend more of their income on food, but food inflation often leads to spending cutbacks in other areas and overall inflation remains subdued.

Without inflation, the remaining fundamental driver of gold prices is jewelry demand. A slow growing economy should hold down demand for jewelry, so the technical target of $1,150 an ounce now seems to make sense based on fundamentals as well. Gold could easily fall more than 20% from recent levels without inflation in a slow economy.

Traders can establish short positions in gold with the PowerShares DB Gold Double Short ETN (NYSE: DZZ). The 26-week moving average should be used as a stop, and with a technical target of $6.91, the trade should deliver a gain of more than 35%.

Recommended Trade Setup:

— Buy DZZ at market price
— Set initial stop-loss at $4.72
— Set initial price target at $6.91