Tuesday, May 18, 2010

Some Not So Deep Thoughts On Gold

From the "Department Of It's A Sure Thing", we have, once again, investors being told that an asset is a sure thing just as it is making new highs. Yes, they tell us it is different this time, but how many times do you have to hear that to realize that it is never different? The reasons to own gold at $1200 are the same reasons to own it at $1000 an ounce or $800. But like every asset, nothing goes straight up. I would rather be a buyer at lower prices (and I was) than higher.

In any case, here we have the infamous Jim Cramer making the "sure thing" call on gold, and all the reasons he gives to rush into gold have existed since, well, the beginning of time. I am not a breakout kind of buyer, and I would rather make my purchases of an asset when they are lower and off everyone's radar. It is just my style. Based upon the technicals (not Cramer's ability to market time), which I will review below, I reduced my position in the SPDR Gold Trust (sybmol: GLD) by 60% this morning. You can see my real time portfolio by clicking on this link: PORTFOLIO.

Figure 1 is a monthly chart of the SPDR Gold Trust (symbol: GLD). The pink labeled price bars are negative divergence bars, which imply slowing upside momentum. Typically, the highs and lows of these negative divergence bars will lead to trading ranges. Currently, price is only at the high (119.54) of the recent monthly negative divergence bar or at the upper end of what is likely to be a trading range. A monthly close over this level would be the "breakout" and suggest that this time is different as traders who are short cover their positions. My guess is that we will need some time before mounting this hurdle.

Figure 1. GLD/ monthly

Figure 2 is a weekly chart of GLD. Negative divergence price bars are identified, and we note that the current weekly price bar is a negative divergence bar (pink bar within gray oval). This price bar has a low of 118.61 and a high 121.12. In addition, if this price bar becomes a negative divergence, we are starting to see a cluster of negative divergence bars, and this implies we are towards the end of a price move rather than at the beginning. (See the negative divergence bars to the left of the graph). Support would be the low of the current negative divergence bar, but I definitely would not want to see GLD close below key support at 115.07.

Figure 2. GLD/ weekly

Figure 3 is a daily chart of GLD. 118.96 is the first level of key support and as I type, price is flirting with these levels. The next level of support is at 113.55.

There you have it! Some not so deep thoughts of gold. From this perspective, the fundamentals continue to be the same. It is just a matter of where and when you (not me) want to buy.

Figure 3. GLD/ daily


hettygreen said...

I hate to say it but as a gold agnostic I've made more money trading the downside than the up (same thing with oil). I'm watching it closely, my contrarian antenna having picked up a fair number of blog commenters signalling they wouldn't dare short it at these levels.

Guy M. Lerner said...


as a "pure" price person, I am agnostic as well; I have laid out my thoughts where this time will be different if it is; but at this point, it was time to take some off the table

Anonymous said...

the COT traders are a good indicator. Many went short days ago. Gold does best when credit deflation is on the table, and it is, but most see the money printing as inflationary--so gold will be taken down. However, one will need lots and lots of gold if Germany's latest move to halt shorting of their banks for the next YEAR is an indicator--think carefully about what this might mean--what it might mean globally?

hettygreen said...

I thought gold did well in the inflationary environment of the late 1970s? Maybe I'm turned around on this but I see popular (and I believe currently mistaken) fear of inflation, governing the rise in price recently. I would not discount the influence of the systemic collapse crowd too but still believe the cultivation of "every man's fear" (and lack of understanding) of Weimar type inflation is a large driver of price at this stage. Considering how long it took to wring out the credit inflation of the twenties this process (disinflation or outright deflation) might go on longer than a lot of people think.