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Technically speaking, I should have titled this post GLD: The Moment of Truth. Even though GLD is a good proxy for gold, I can think of quite a few scenarios (not all of them conspiracy theories) whereby GLD and gold stop being perfectly correlated. But for the sake of argument and acknowledging that GLD's stated goal is to mimic the price of gold, let's assume GLD and gold are indeed perfectly correlated and let's do the technical analysis based on GLD.
First the bad news. As we can see in the first chart, the GLD weekly (click to enlarge), the gold ETF might have completed a double-top below 100. Not only that but it has broken its 20-week simple moving average and both the 14-week RSI and the slow stochastic indicator are unequivocally pointing down. That's for the technicals.
The sentiment background towards gold is quite negative also, with a consensus crystallizing these days that the worst of the financial crisis is over, the world as we know it is not coming to an end and a hyperinflationary dystopic future is not in the cards just yet. All of these reasons and/or excuses to buy gold at any price have therefore, if not completely disappeared, at least receded to darker corners within the collective subconscious of the relevant market players.
So, undoubtedly, we are in a downtrend within a larger gold bull market. What needs to be elucidated is how damaging this downtrend is and where/when does it signal the end of the gold bull and not merely a corrective move.
That's where the second chart comes in, the good news part of my argument. One of my all-time favorite type of charts is the relative or ratio chart. There is no rocket science involved, yet there is no better type of chart to clarify, simplify and deepen any technical analysis of any kind of security. The chart (click to enlarge) simply shows us the daily ratio of GLD over SPY, the S&P500 ETF and it is clear that gold has been outperforming the index spectacularly for quite a few years now. Even with the current bout of relative gold weakness, the trend of GLD relative to SPY is still steeply up for now.
That long-term uptrend would be seriously damaged if and only if two key supports are decisively breached. One is last January's low at 78.87 and the other and most important one is around 70, the 2006 high that also, not coincidentally, turned out to be the low for the Fall of 2008 panic liquidation.
Let's keep the Hawk-Eye on these two levels.
Disclosure: Long gold
1 comment:
Yes, this is a moment of truth for gold. If it can't break the recent highs then another major swing down is highly probable. The majority of investors are not long gold (e.g. a Jim Rogers straw poll of a group of Fund Managers / Investors determined approximately 75% have never invested in Gold), but every one seems to think its going alot higher and the bulls seem to be exibiting greed and complacentce.
A general upswing in the currency markets(including the dollar) may just be starting which could result in an effective downward repricing of Gold in dollars and other currencies (this might be the catalyst for another major down swing in Gold).
The other side of the coin is that Gold could rally much higher, but the fear of economic collapse necessary to perpetuate the bubble may not be forth coming (we have had a lot of fear over the last two years and it has not yet driven everyone to invest in Gold).
The banks, who need to increase their reserves, may look at the price of gold adjusted for inflation and put it down for long term accumulation at much lower prices (i.e. after this price bubble has burst) Buying it now at these relatively high prices as a very long term investment does not make sense (unless you expect ongoing economic collapse). The majority of bankers may well be selling gold reserves and investing the money else where.
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