Sunday, January 25, 2009

Gold: Let's Try This Again

My last post on gold was a great display of market timing. Unfortunately, I didn't say "Buy gold as it is going up 5% today." That would have been timely. The only thing timely about my analysis was that I happened to publish it on a day that gold "popped" 5%.

Ok, so what does the recent strength in gold mean? (Good question by reader JT ~ thank you!)

Despite Friday's strong showing, gold still remains in a trading range. Figure 1 is a weekly chart of continuous gold futures contract showing gold at the upper end of that trading range. But for me the question is this: is this the launching pad that will lead to a multi -month price move in gold?

Figure 1. Gold/ weekly

I still don't believe so. I am basing my statement on the fact that every strong move in gold since the 1970's was preceded by the "next big thing" indicator being bullish or a prolong period of consolidation. Look at figure 2, a monthly chart of gold going back to the early 1970's.

Figure 2. Gold/ monthly

The "next big thing" indicator is in the middle panel, and remember, all this indicator does is identify the high likelihood for a secular trend change. (We use technical analsysis to confirm the trend change.) This indicator quantifies a multitude of technical factors seen at market bottoms, and it works across multiple markets. The "squeeze" indicator in the lower panel looks for statistically relavent periods of low volatility. It is these contractions in the price range over many months that leads to a launching pad for a new secular trend even when the "next big thing" indicator is neutral. The vertical lines identify the best times to have been invested in gold, and as you can see, the "next big thing" or "squeeze" indicators were positive for a trend change.

Now to the current market, and neither of these technical factors are positive. Now it doesn't mean that gold won't be higher in 3 months, but if past history is any guide, I don't see this as a launching pad to a new bull market.

Lastly, let me show an updated graph (figure 3) from the recent article, "Gold: Relative Performance v. Currencies"; the indicator, which looks at 8 currencies relative to gold, still has not turned up. I thought that the observation made by one of our readers (Guru) that this was the 4th or 5th pivot in the down trend of the indicator was insightful, and I believe it has merit. This would be a good place for downtrend to end. However, even with Friday's strong action, the indicator has not broken out of its downtrend. Being a relative strength type indicator, I would expect the indicator to lead the price of gold higher.

Figure 3. Gold/ weekly

I will continue to follow.

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