Profiting from gold without the pain

Getting onboard a major bull market and riding it until it comes to an end is a very profitable way to invest. It is, however, much easier said than done. In many ways being right in ones investment thesis is the easy part. Far harder is having the patience and fortitude to stay the course. This is particularly true when it comes to gold.

Gold has risen for twelve years in a row, however it has not been an easy ride. Along the way long-term investors have had to endure a plunge of 22.9%, 34.1% and most recently 31.3%, as well as many smaller corrections.

The fact that the direction of global monetary policy has not fundamentally changed, does not make holding gold at times like these any easier. Long suffering gold bulls need to ask themselves an important question: Is, is there a way to profit from the gold bull market without enduring the pain of these big corrections? The answer is yes.

The chart below shows the last six years of the gold bull market. Overlaid on top of the gold price are some simple trend channels.

A 6 year (daily) chart of gold (Click on the chart for a larger version)

A 6 year (daily) chart of gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

These trend channels contain the price movements, and crucially, capture the major directional changes in the price. This allows investors to exit the market (red arrows) whilst the price in a downtrend and reenter when the price breaks out of the downward sloping channel to the upside (green arrows).

Those trading gold can draw these trend channels on a chart with a shorter timeframe, however a chart such as the one shown allows long-term investors to capture the bulk of a market move, whilst also protecting their downside.

The book Far From Random by Richard Lehman provides the detail on this simple but effective technical tool.

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