Gold is one of the most malleable and least reactive elements known to man. It’s used for both practical and symbolic purposes.

Historically, gold has been one of the most common forms of monetary exchange throughout human history. Its secondary place to paper currency did not come about until the 20th century.

And after continuously rising to new highs even after a multi-year bull market, one other thing can be said about gold: It can also make traders a lot of money…
With gold rallying to record highs almost daily, it’s seen increasingly as a way to protect oneself against worldwide currency inflation.

Inflationary worries were prominent news this trading week. China’s central bank raised its interest rates — for the fourth time since mid-October — to head-off price increases running at nearly 5% a year. The European Central Bank also raised rates for the first time in nearly two years, in order to curtail rising food and energy costs.
In the United States, rising interest rates may be on the horizon as the Federal Reserve assesses the need to control recent spikes in commodity and energy prices. Several Fed governors have turned hawkish and stated rates may need to rise before 2011 is over.

Add inflationary worries to a weak U.S. dollar, intensifying geopolitical tensions and continued natural disasters that are wreaking economic havoc, and gold should continue to perform well.

A great way to play the gold rush without having to invest in volatile gold mining stocks is to purchase the metal through a gold bullion exchange-traded fund (ETF).

SPDR Gold Trust Shares (NYSE: GLD) is the largest physically-backed gold ETF.

Because the bullion is bought and held in a vault instead of invested through futures contracts, as a trader, this means you can in effect own physical gold without having to literally purchase and store it yourself.

The ETF has a reasonable expense ratio of 0.4% and currently has a total net asset value of about $56.4 billion. In the past year, GLD has returned 29%. By comparison, the S&P 500  has increased about half that, or 14.3%.

Technically, it appears GLD could continue to rise on strong momentum.

 The fund is in a Major uptrend and surpassed an important resistance zone between $139.54 and $142 during the trading week of April 4.

The ETF hit the lower level of this resistance band several times in late 2010, but was not able to break it. Unable to maintain strength, GLD fell to a low of $127.80 in January 2011, testing the Major uptrend line, which intersected around this level. However, in mid-January 2011, the fund quickly bounced off $129.83 support and has been on the rise since.

An accelerated Intermediate-term uptrend line has now formed. This uptrend line, which intersects with resistance near $140, marks the formation of a second small ascending triangle pattern, bullishly formed off a larger ascending triangle, marked by the Major uptrend line and $129.83 support.

Since GLD has just bullishly broken out of this second ascending triangle, the trend is up.

According to the measuring principle — calculated by adding the height of the triangle to the breakout level — GLD could easily reach a target of $154.65 ($142.24 – $129.83 = $12.41; $12.41 + $142.24 = $154.65).

With no historical resistance in sight, the fund could easily soar higher. As a result, a target could potentially be double the triangle’s height ($12.41 x 2 = $24.82; $24.82 + 142.24 = $167.06).

The indicators — RSI, MACD, Stochastics and Williams %R — are all bullish.

Since early 2011, RSI has been in an accelerated uptrend. At nearly 70 and rising, RSI is approaching, but has not yet hit, overbought levels.

MACD has given a buy signal, indicated by the black line crossing above the red line. The MACD histogram is now poking its head in positive territory.

Stochastics and Williams %R, both overbought/oversold indicators, show the fund is overbought, however, both remain on buy signals. Strong securities can become and stay overbought for long periods of time.
 
Given GLD’s strong fundamentals, combined with the current threat of inflation, I plan to go long on GLD. I will enter the trade at the market’s opening on Monday, April 11. My stop- loss is $129.82, just below important historical support from September 2010. My target is $167.06. The current risk-to-reward ratio is about 2:1.

Action to Take –> Based on the analysis above, you can trade GLD by purchasing it at market prices and setting a stop-loss at $129.82. A reasonable target price is $167.06, good for a potential profit of 17.5%.

P.S. — I don’t know if you’re aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America’s electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…