It appears as if Gold is at a critical juncture at present.  As seen in the chart below (which depicts Gold on a daily basis, LOG scale, since 2008) Gold, at $1594.60/oz, is currently right below both the 200dma (depicted in red) as well as the rising trendline (recently broken to the downside) since early 2009:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

From an overall Technical Analysis standpoint, on both daily and weekly viewpoints, Gold appears vulnerable to a (significant) decline.

I have recently written of the broader implications of Gold’s price movements.  In one post, that of August 25 (“Gold And Deflationary Pressures“) I wrote the following, which I feel is still currently applicable:

I am very closely monitoring Gold as I believe a steep, abnormal correction could serve to (further) indicate deflationary pressures – which of course would have outsized impacts on financial markets, the economy, and economic policy (particularly QE3 or some other large intervention.)

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1265.43 as this post is written

Now, the December Gold futures are at $1645.1/oz.  If one views Gold’s ascent from early 2009, one can see a rising trendline – one that seems very significant.  A daily chart of Gold since 2008 is shown below, with the rising trendline (which has served as support) in blue, as well as the 50 and 200dmas in dark blue and red, respectively:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; annotations by the author)

I am continuing to monitor Gold’s correction very closely, for many reasons including those indicated in the aforementioned August 25 post.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1175.38 as this post is written

Point #4 on the list was “…an expectation of high future inflation.”

It should be also noted that the inverse of this condition – an expectation of deflation – can serve to depress Gold’s price.

This is particularly noteworthy at present, as Gold has recently started a correction after a very steep rally.  I am very closely monitoring Gold as I believe a steep, abnormal correction could serve to (further) indicate deflationary pressures – which of course would have outsized impacts on financial markets, the economy, and economic policy (particularly QE3 or some other large intervention.)

For reference, here is the daily Gold price chart for the last 5 years, updated through yesterday, shown on a LOG scale with both the 50dma  and 200dma lines as indicated:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; annotations by the author)

Gold at $1726/oz (December futures) at the time of this post

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1176.07 as this post is written

Back on September 22, 2010, I wrote a blog post (on another site) titled “What is Gold ‘Telling Us’”? I have reprinted it below, as I think that it is important to recognize the potential factors involved.  Of course, this does not speak as to whether the rapid ascent is sustainable, or ultimate price targets.

Here is the post:

As Gold continues its rapid ascent, I think it is important to consider what such price action may be “telling us.”

Many classify Gold’s strong price action as that of an asset experiencing a “bubble” – and as such do not properly heed the fundamentals that may be driving its price action.   I have previously discussed whether Gold is in a bubble in this post.

While Gold may be advancing for many reasons, I would offer these (in no particular order) as among the top reasons for its ascent:

1. Vulnerability of the US Dollar to a substantial decline, discussed in this article.
2. Excessively low interest rates.
3. Too much “money printing” – both now and projected in the future.
4. Related to Points 1-3 above, an expectation of high future inflation.
5. Large money flows into the Gold market, which is relatively (in proportion to other asset classes) small.
6. A portent of an impending adverse economic event(s)
7. Related to point 6 above, a desire to obtain a “safe haven”

I believe that the most important issue for those holding Gold is the following, as I mentioned in the “Is Gold Experiencing A Bubble?” post mentioned above:

“Perhaps the greater question should be whether various asset classes are currently experiencing bubbles, and whether Gold is just one of a few (or many) classes in such a condition. In effect, is Gold’s price strongly (positively) correlated to that of other asset classes, and if so, why?”

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1347.99 as this post is written

Gold (June Gold futures) at $1512/oz as this post is written

Below is a chart that I find interesting.  It shows, from the year 2000 to present, the prices of Gold and the U.S. Dollar on a daily basis, linear-scale:

(chart courtesy of StockCharts.com;  annotation by the author)

(click on chart image to enlarge)

-

As one can see, as annotated by the horizontal blue line, since the U.S. Dollar closed at a low of 71.45 on March 26, 2008, Gold has gone from roughly the $1000 area to yesterday’s close of $1455.80/oz.  Meanwhile, the U.S. Dollar has yet to fall below that March 26, 2008 low.

This can be interpreted in a number of ways.   One interpretation that I favor is seen stated below, from a piece I wrote on February 3:

Further supporting the idea that the U.S. dollar is vulnerable is the very strong price action of gold, other commodities, other currencies, and the stock market. While it may be easy to believe gold and other commodities are in a bubble, such strong price action (which has far outpaced the U.S. dollar’s decline to date) may well be indicating a large impending dollar decline.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1332.63 as this post is written

I would like to start by featuring a couple of long-term charts of the U.S. Dollar.

U.S. Dollar weakness is a foremost concern of mine.  As such, I have extensively written about it.  I am very concerned that the actions being taken to “improve” our economic situation will dramatically weaken the Dollar.  Should the Dollar substantially decline from here, as I expect, the negative consequences will far outweigh any benefits.  The negative impact of a substantial Dollar decline can’t be overstated, in my opinion.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support (until 2007) that has now turned into (technical) resistance:

charts courtesy of StockCharts.com (click on images to enlarge charts):

Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents both a trendline as well as a relatively good visual “best-fit” line.  The gray dotted line is the 200-day M.A. (moving average).  As seen on this chart, the U.S. Dollar looks vulnerable to continuing its downward trend that has been interrupted since early 2008:

Lastly, a chart of the Dollar on a weekly LOG scale.  There are some clearly marked  channels here, with a large, prominent triangle featured.  Triangles are thought of as “continuation” patterns.  In this case, it would be a continuation of the Dollar downtrend since 2002:

-

Next, onto the Japanese Yen.  Up until 2-3 years ago, it was widely believed and (commented upon) that a rising Yen was a sign of danger.   This belief seems to have diminished; however, the strength of the Yen has not.  Is the rising Yen still a signal of danger in the markets?  I believe that it is.

Here is the daily chart since 2005 as depicted on a LOG scale.  The 50-day M.A. is shown in blue.  As one can see, there has been a continued string of strong uptrends, and the Yen pricing action is increasingly “parabolic” in nature:

-

Lastly, a Gold chart.  I have written many posts about Gold.  Of course, the most common question that arises with regard to Gold is whether it is in a bubble, which I have discussed previously.  Certainly, the price action since 2001 would support such a claim.  However, there is much more that should be considered before one can conclude that Gold is in a bubble.

Here is a monthly chart since 1980, as depicted on a LOG scale.  It is interestingly to compare how Gold’s rise has correlated with U.S. “reflationary” efforts over the last 10 years:

Now onto Part III, a look at the bond market and interest rates…

_____

A Special Note concerning our economic situation is found here

SPX at 1183.08 as this post is written

Traditionally, houses have been viewed as “hard assets.”  However, as one can see above, their recent (from a long-term historical perspective) price pattern seems more geared to that of a “paper asset” – i.e. strong performance during the ’80s and ’90s, while significantly underperforming Gold for roughly 7 years.

There are many other observations and interpretations that can be made from this ratio as well.  It certainly “frames” home prices in a different light, especially from an investment standpoint.

Going forward, it will be interesting to see how this ratio evolves…

________

My previous posts on Gold can be found under the “Gold” tag.

back to <home>

SPX at 1189.38 as this post is written

One aspect during Gold’s price increase that I have noted as disconcerting is the relative lagging performance of the Gold stocks.  I use the HUI index as a proxy for Gold stocks.

As one can see on the daily chart below, the Gold price is reflected in the top of the chart, followed by the HUI:Gold ratio and then HUI in green:

chart courtesy of StockCharts.com

The HUI index has lagged since approximately the beginning of 2008.  Perhaps the main question is if/when might it start performing better?  One potentially bullish sign is a potential Cup and Handle formation with the two peaks above 500 and current upswing serving as the “lid” and “handle” of the Cup and Handle formation, respectively.

Of course, this Cup and Handle formation is very tentative at this time.  It is simply something to monitor.  However, should this C&H formation “play out” with the HUI strongly advancing above the prior peaks above 500, one could reasonably expect the gold price to react positively if not very much so.  Should it not play out, i.e. the HUI price falters or declines from here, would likely be a bearish omen for Gold.

As I have pointed out in previous posts, Gold’s price can have very important implications from many financial and economic perspectives.  However, due to the complexity of the factors that determine Gold’s price, it can be very difficult to predict its price movements.

back to <home>

SPX at 1066.43 as this post is written

Below is a long-term monthly chart of the Dow Jones Industrial Average price relative to that of Gold’s.  As one can see, Gold has been outperforming since roughly 2001, after underperforming from roughly 1981-2000:

chart courtesy of StockCharts.com

Below is a long-term monthly chart of the Crude Oil price relative to that of Gold’s.  As one can see, the Gold price has been bouncing around in a range since 1990, and is now at a slightly subdued level:

chart courtesy of StockCharts.com

One can infer many different things from these two charts.  With regard to the first chart, one way to view this is to see how “hard assets” are performing relative to “paper assets.”  With regard to the above chart, one can see how Gold is performing to another commodity, crude oil.  From this crude oil to Gold price comparison, one may interpret Gold’s unique “safe haven” value.  If one chooses to view the chart in this manner, one could draw the conclusion that from a “safe haven” standpoint, Gold’s price is not reflecting much of a “safe haven” value.  This view is consistent with previous comments I have made with regard to Gold.

I strongly believe that the strongest driver of Gold’s price (especially relative to other assets) will be if/when it is viewed as the ultimate “safe haven” asset.  This condition would likely occur concomitant to a repudiation of “paper” assets.

back to <home>

SPX at 1098.76 as this post is written

I find it amazing  that even after the long parabolic rise we have seen in Gold since 2001, we are still far short of that inflation-adjusted price.  On an “all things considered” basis one would have thought that Gold would have performed stronger over the last 30 or so years.  The Gold price really went into submission from 1980-2000.

I think it underscores the fact that at least from a historical perspective of the last few decades, it has been very important as to when Gold is purchased. 

I mention this as Gold appears overdue for at least some type of correction.  The recent price action, resulting with Gold now at $1169 (December futures) has been strongly parabolic.

I think that many factors are now in play that will generate considerable volatility in Gold’s price going forward. 

Gold’s price should be very interesting to watch, and I think it carries great significance on a number of fronts.

back to <home> 

SPX at 1106.24 as this post is written