A Slightly Different Take On Gold

The fundamental reasons for higher gold prices have been brought to the fore this past week as the Federal Reserve has pulled out all the stops and opened the monetary spigots. Printing presses are turned on; the currency gets devalued; investors flock to gold as a store of value. Gold bugs envision gold at $1500 next week as the "big one" has arrived.

That's the story behind the story. However, the technical picture appears to suggest a different story. See figure 1, a monthly chart of a continuous gold futures contract.

Figure 1. Gold/ monthly

With a monthly close below the pivot point (labeled #1), gold entered a bear market. This was an "m -type" top. Four months later, gold is now peaking above a down sloping trend line and is trading just below its simple 10 month moving average. A monthly close over the trend line and the 10 month moving average will reverse the bearish trend. A monthly close above the pivot point (labeled #1) is very bullish. As we are not at the end of the month, the bullish signal has not happened yet.

What has happened is best seen on a weekly chart of gold. See figure 2.

Figure 2. Gold/ weekly

The March, 2008 highs are labeled with a #1 and the October, 2008 lows are labeled with a #2. The current upswing is an exact 50% retracement of the down draft that occurred from points #1 to #2 or the high to lows. Furthermore, the pattern of lower lows and lower highs is unlikely to be broken with this upswing.

So let's summarize the following for gold: 1) a new bull market has yet to be confirmed; 2) the current bounce is an exact 50% retracement into a down sloping 10 month moving average or 40 week moving average; 3) the pattern of lower highs and lower lows is intact.

While the price action has been strong and the fundamental story is plausible, the technicals suggest a pull back. For now and until confirmation of a monthly close over the trend line in figure 1 (or the simple 10 month moving average), this does not appear to be anything more than a strong bounce into resistance.