October 23, 2010

More on Gold

You may have expected yet another bumper week for the shiny metal. However, this week marked the first time since mid-summer that Gold has run into some head wind. After a massive bull run reaching new all-time nominal records nearly every week, Gold has retraced about 3% this week. Is this the beginning of the end or was it just a minor pause in an otherwise massive long-term up-trend?

While taking nothing away from this amazing bullish move in Gold during the past decade, we have been expressing concerns about a possible bubble and listed a number of caveats about loading up on Gold indiscriminately.  Most notably, the concerns are two-fold: a) Gold is not a traditional investment in that it provides no inherent yield or return other than price appreciation and b) Gold is a commodity nonetheless and as such exposed to significant volatility.  You can review some of our previous comments on Gold at FXIS/Gold.  With regard to external and fundamental factors causing concerns, John Authors of the Financial Times expresses these concerns much more elegantly than I can. Please consider: Remember 1980: all that glisters is not gold.

John Authors makes a sound argument in warning about the speculative element of this ongoing gold run.  Although highly unlikely, one must consider a possibility of a repeat of the implosion in gold prices after the bubble burst in 1980.  At the same time, one cannot ignore the fact that such a repeat would also imply that we are not yet in the final stages of a bubble. Instead, the current bull market might continue to prices above $2,000 comparing the 1980’s peak in today’s in inflation adjusted dollars.  A look at charts may give us a better sense of what some possible scenarios could look like.

A first indication of head-wind can be seen in the swift price decline of Gold mining stocks measured by GDX, an exchange traded fund tracking gold miners. The medium-term uptrend has been reversed this week.


With regard to Gold ETF (GLD) and Gold futures, both have arrived at the lower end of the up-ward trend-line, a test of which may ensue in the coming days.

GLD-2010-1022   Gold-Fut-2010-1022

Taking a slightly long-term view however, it is clear that the current retracement is just that, a pause in the otherwise continued up-trend.


Examining the near term trend in more detail, we have witnessed some profit taking resulting in typical price declines often measured by Fibonacci retracement levels. Plotting these retracements, we can see a possible further decline to about $1250.  Price declines measured with these tools imply a likelihood of prices within 38.20% and 61.80% declines from recent low to recent high.  Therefore, Gold could trade within a range of below $1300 and about $1250 without violating the ongoing longer term trend.


Taking a look at a more neutral Gold price indicator i.e. Gold valued in Euros, the precious metal is also trading at an interesting inflection point.  The near-term Gold trend has actually been bearish since the beginning of this summer.  Gold/Euro has now approached an important technical support area.  Failure of this support would make the case of a test of the 900 area.  That scenario would then be a more realistic test of whether the metal is still going to shine with all its brilliance. 


From a technical perspective then, the long-term bull market in Gold is still alive.  However, there are signs that further profit taking may test the lower boundary of this ongoing mega-trend.  The coming week might shed some more light into the longer-term direction. Meanwhile, short-term traders should be prepared for a bumpy ride ahead.

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