Market Pros: Is Gold a Bargain or Falling Knife?

Thursday, 27 Jan 2011 | 6:54 PM ET

Gold closed at its lowest levels since October. Is this your time to dive in? Or should you stay far, far away?

Fast trader Brian Kelly is bullish and believes it’s time to pull the trigger. “I’m a buyer at these levels. I think it goes to much higher prices.”

Kelly tells the Fast Money desk he’s largely bullish because in the past gold has been highly correlated to money supply. “If you look since 1973 there’s about a 70% correlation with M2. If you look over the past ten years it’s almost a 90% correlation,” he says.

And Kelly thinks that the Federal Reserve under Ben Bernanke will pump as much money as it can into the economy.

On top of that, Kelly thinks that as the rest of the world tightens, Bernanke will be inclined to stick with easy monetary policy.

He reminds the desk that Ben Bernanke is a student of the Great Depression. “His whole academic world has been about Depression research. And he’s said the mistake (in the 1930’s) was the US did not expand money supply while the rest of the world tightened."

Trader Stephen Weiss, author of The Billion Dollar Mistake, doesn’t buy it.

He believes the US Fed will tighten soon. But more than that he says, the climb in “gold was a momentum trade and emotion drove it past where it should have been. That same emotion should now take it down.”

That begs the question, how far?

Looking at the technicals, 1260 was the June 2010 breakout. Chart watchers say former resistance becomes support. However Weiss thinks over-shoots to the downside. “Momentum is broken,” he says. “I pressed the short button today.”

Word on the Street
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* You can find our conversation on this topic at the end of the Word on the Street video at your left beginning at 16 minutes.

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