The Financial Commentator: Gold and Gold Stocks
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The Financial Commentator: Special Update
November 5, 2009
As promised in the October 18, 2009 letter, this is a Special Update for gold and the gold stocks.
As gold broke out of the triangle discussed in the August letter in early September, it made progressive new highs above the May 2009 peak in September, October, and now November. The gold stock indices also exceeded their May highs in September and in October. However, the gold indices are trading 6% below their October peaks, even as gold has pushed above $1,090. As gold was making new highs in September and October, the dollar made progressive new lows. With gold making a new high and assaulting $1,100, the dollar is holding 1% above its October low. This performance divergence between gold and the gold indexes and the dollar is at least a short term negative for gold and the gold stocks.
However, the intermediate term picture is also sporting an even more glaring divergence between gold and the gold stocks. When gold topped just over $1,000 in March 2008, the XAU was 209.27 and the HUI was 519.68. Gold is now 8% higher than its March 2008 peak, but the XAU is 170, or 18% lower, while the HUI is 17% lower at 430. In March 2008, the dollar was trading near 71.00, while it is trading just below 76.00 now. Given the negative sentiment toward the dollar, one would never guess it is up 7% from its multi-year low.
This performance divergence between gold and the gold indexes and the dollar suggests that gold is finally nearing an important intermediate top.
The gold indexes have retraced about 78.6% of their March 2008 to October 2008 decline (XAU 178.08, HUI 440.62), which looks like a B wave rally. Meanwhile gold has looks like an irregular B wave rally, since it rallied to new highs. If this pattern analysis is correct, both the gold stocks and gold are on the threshold of a large correction, possibly back to the 2008 October lows over the next year. Hard to believe. But with so much bullishness around in gold and the significant technical divergences, this is exactly the kind of environment that most tops are made, regardless of the market.
I would be surprised if gold doesn’t push above $1,100, at least temporarily. However, gold should not close above $1,115, so that will act as the stop for the following strategy, which is going to break the exposure into thirds.
DZZ – Buy 33% now ($15.20), 33% below $14.95, and 33% if it trades down to $14.65 – $14.35.
GLD – Short 33% now ($106.82), 33% above $107.50, and 33% if it trades up to $108.50 to $110.50.
Jim Welsh
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November 10th, 2009 at 5:49 pm
Right now gold is not about technicals. It is about psychology. It is about solvency. Both from a macro and micro perspective.
November 10th, 2009 at 6:01 pm
Gold is the poor man’s “collectable,” a nearly worthless commodity knighted special status by the cons who manipulate it’s perceived supply/value.
November 10th, 2009 at 6:04 pm
Good luck with this strategy… I would strongly recommend using stops on all your short-gold positions. Do you not understand that BIG money (ie Foreign Central Banks and Institutions) are behind this gold bull market, not Joe the barber and Vinny from Brooklyn? Geez, gold is less than 10% from its’ breakout and now it is topping?
November 10th, 2009 at 6:32 pm
Perhaps you should read this:
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/indias-big-vote-for-a-gold-rally.aspx
November 10th, 2009 at 6:35 pm
@ impermanence
Spoken like a true day-trader. Even if you bought into precious metals, it would probably be through an ETF right?
November 10th, 2009 at 7:05 pm
Pat G.
At every top and bottom, it is always about pyschology. Can you rmember the last time you heard anyone on cnbc or bloomberg say anything negative about gold? But excessive bullish or bearish pyschology can carry any market further. That’s why the technical divergences between gold, and the gold stocks and silver may be indicating that gold is set up up for a correction. That’s all I’m saying. My guess is that after this correction, gold will run higher into the first quarter, along with the stock market.
To the extent that people and countries are buying gold based on inflation, I would suggest they take a look around and notice that credit is still contracting in the real economy and that velocity is also contracting. It has been said that inflation is too much money chasing too few goods. What we have is too little money chasing too many goods. The other driver is the supposed increase demand for stuff, once the world economy kicks into gear next year. I expected a V-shaped recovery to take hold last spring. I do not believe it will have the strength to become a self sustaining recovery. That should become apparent next spring. About when the Fed pulls the plug on all its purchases of MBS.
November 10th, 2009 at 7:24 pm
@ Jim Welsh
I heard Carusso-Cabrera refer to the purchase of gold as the “fear trade” again, this week. Thanks for expanding on your short term gold forecast which I agree with. What we also have, are countries who through various liquidity measures are devaluing their currencies (another form of inflation) not just the U.S. So, what is your long range forecast for gold?
November 11th, 2009 at 9:32 am
[...] Technical Comments on gold and gold stocks: http://www.ritholtz.com/blog/2009/11/welsh-letter-gold-and-gold-stocks/ The DJIA (10246) is trading in an up trend (9816-11684), while the S&P (1093) [...]