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Investing in Gold: Why the "Golden Cross" is a Big Deal

By , Contributing Writer, Money Morning •

Investing in gold and silver already offered staggering profit potential, and the opportunities just got even brighter.

Gold this week reached a "golden cross" and silver is perched to traverse one in a matter a days, following successive weeks of bullish trends in both precious metals' markets.

A golden cross occurs when the current price of a commodity (or an equity) and the shorter term moving averages "cross" or rise above the longer term 200-day moving average.

After 18 months of tepid and sometimes lower price movement, gold and silver have formed a large foundational base while enjoying two of the longest and strongest bull markets in history, according to research from Business Insider.

Now the golden cross has delivered technical support for higher moves for both metals.

"We're going to see new highs in both gold and silver in the first half of the New Year," said Money Morning Global Resources Specialist Peter Krauth. "I don't see anything that will keep this from happening."

Here's why Krauth is so bullish on gold and silver.

The Importance of a Golden Cross

As long-term indicators carry more weight, a golden cross points to a near-term rally. It is cushioned by heavy trading volume.

After the cross has been completed, the long-term moving average becomes the new support level in the bull market.

Precious metals chart watchers view a golden cross as a signal that the market has moved in favor of the underlying commodity. These moving averages and support/resistance levels are key indicators of sustained technical strength.

John Bollinger of BollingerBands.com noted in January that "the golden cross is a great tool in a big, roaring bull market, like the bull market from 1982 to 1998, when it tell you when you're supposed to be in the market and tells you periods in which the risk is somewhat higher of corrections and such."

Gold's 50-day moving average has risen to $1,651 a troy ounce and now rests easily above the 200-day moving average at $1,645.

"Given shorter-term moving averages have all turned higher in recent weeks and the bullish price action recently, this golden cross today is an additional indicator of strength in an already strong market," Adam Sarhan, chief executive at Sarhan Capital told Reuters Thursday.

Following the last golden cross in February 2009, bullion prices were buoyed 11% in the following 11 sessions, and went on to surge 103% over the next two years. Similar gains are anticipated today based on current robust fundamentals.

According to data from Business Insider, if gold were to mimic those 2009 gains, the yellow metal could double from its present $1,785 to over $3,500 an ounce.

Silver's 50-day moving average has risen to $29.86 an ounce and is poised to test the 200-day moving average at $30.47. (Scores of traders, including the commodity guru Jim Rogers, favor silver over gold because silver prices are roughly 40% below their highs while gold is some 10%-15% below highs.)

Silver also glistened after navigating across a golden cross during the same period. At the time, the white metal was trading under $14 an ounce. It went on to skyrocket a whopping 257%, rising to more than $49 an ounce by April 2011.

Central Banks Banking on Gold

Global central banks have also taken a keen shine to gold over the last several months, adding to their stores to shore up assets following loose money policies.

The European Central Bank, the U.S. Federal Reserve and the Bank of Japan have all announced additional stimulus measures. And, China appears to be the next to implement such action following fresh data that showed further contraction in the Asian nation's manufacturing sector for the 11th straight month.

The flood of dollars into these economically sensitive worldwide economies and the historic low interest rates has investors fearful of inflation, turning them toward safe-haven gold as a hedge.

The more money the Fed prints, the more valuable gold and silver become in dollar terms.

"With the open-ended scheme to print as much dollars as needed until the U.S. economy recovers, gold's uptrend has fewer barricades on the way at least to earlier highs. Charts hint at a major resistance at $1,787-$1,790, where we have failed thrice earlier. Thus, consecutive closing above $1,790 will be a necessity to avoid a profit taking correction," Richcomm Global Services senior analyst Pradeep Unni said to Reuters.

Gold prices glowed Friday morning rising $16.50 to $1,785 an ounce, on course for five straight weeks of gains.

Silver also looked sterling, jumping 1.08% to $35.08.

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