DB Gold Double Long ETN (DGP)

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Grim Economy Creates a Golden Opportunity
By MICHAEL KAHN
http://online.barrons.com/article/SB123488598249200269.html

The rally in gold, despite a stronger U.S. dollar, tells us that people are worried about the economic outlook.

GOLD BUGS TOOK A LOT OF HEAT during the second half of 2008 as the yellow metal performed poorly, along with stocks and other commodities. But a funny thing happened on the way to deflation: Gold bottomed in October and has been rallying ever since.
Last week's action was technically important as prices moved above a loosely defined trendline drawn from the March 2008 all-time high (see Chart 1). I say loosely defined because the trendline really did not describe the action well in the final months of the year. Prices dipped more than 20% below that line and that is a bit much for a technical theorist to accept.
Chart 1


But charting and trendline drawing allow for a bit of wiggle room. We can all agree that the trend for much of last year was down and now it has changed to up. Strip away the patterns and the indicators and that is technical analysis at its core. The market is giving us its most important message that the bulls are back in control.
Indeed, from the big picture point of view, the bulls never really lost it. They were merely taking a breather following a successful foray into four-digit territory – a price over $1000. A monthly chart shows this quite clearly (see Chart 2).
Chart 2


The long-term bull market trendline drawn from 2001 has remained intact. Last year's decline provided a needed correction after an accelerated or even a bubbly rally and that is what has kept me quietly bullish throughout (see Getting Technical, "Gold Stocks Regaining Their Shine", November 24, 2008).
The question investors are asking now is, "How gold can be rallying when the U.S. dollar is so strong relative to other major currencies?"
Since gold is priced in dollars, a strong greenback typically results in a lower price for the metal. But not always.
If the supply and demand condition is stable, then gold and the dollar have an inverse relationship. But if demand for gold starts to build, then it can move higher no matter what the dollar does.
One look at gold priced in Euros bears that out (see Chart 3). From the European point of view, gold is in record high territory and significantly above both its previous high-water marks set in March and October 2008.
Chart 3


Gold is now rallying without regard to currency.
Gold stocks have also been moving higher despite a bleak overall stock market. The Market Vectors gold miners ETF (GDX) had a strong run from its October lows, moving from roughly 16 to its current 37 and change (see Chart 4).
Chart 4


Although the price of the ETF has more than doubled since the lows, the charts show no reason why the trend will end anytime soon. Specifically, it sports good momentum, a rising 50-day moving average and good volume. While many other sectors can boast similar conditions, the gold ETF is one of a very elite group that has also moved above its respective 200-day moving average.
Not only has the short-term trend changed to bullish but the long-term trend has a tentative change for the better, as well.
To be sure, the ETF and gold stocks in general have not recovered as well as gold itself. Gold has retraced roughly 75% of its 2008 decline while the gold ETF has only retraced about half of its loss. Further, there is rather stiff resistance for the ETF overhead in the 42.50 area from a trading range that was in effect about one year ago.
But as a colleague of mine tells his clients, there is always a bull market somewhere. Right now, gold is it.