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Gold Analysis and Strategy: Gold Spot Price Analysis

December 5, 2009

by 

Florian Grummes

Gold Spot Price Analysis

Gold in USD (one ounce = $1,162.40US)

During the last two weeks, volatility in the gold market moved up dramatically. Prices dropped quite fast and heavily between $60 and $80 twice. Both times, the sell-off started in the late hours of the Asian trading session while European and American traders were still sleeping. Slowly but surely powers are shifting from west to east. At the same time, gold was able to reach a new all-time high at nearly US$1,238 followed by a sell-off down to US$1,149. With this action in place, the strong up move during the last couple of weeks is very likely to be interrupted. But it’s not the end of this midterm rally. I am still holding on to my price target of US$1,600 until around March 2010. 

Gold will probably consolidate the massive up move since the last low at US$1,025 in a triangle over the next one to three weeks. Whether the low at US$1,135 is already in place can not be said yet—but it seems to be likely. On the 1h and 4h charts, the indicators are already deeply oversold.

The correction will go on, further and deeper. The maximum downside potential is the old high at US$1,070. But the 50d MA (US$1,090.65) is already higher; therefore, I don’t believe it is very likely that gold will move below US$1,100.

Remember: everything is possible in the markets. If gold closes below US$1,135, that would be a big warning sign. If the US Dollar seems to break out from a wedge to the upside, then we could see a serious rally. If this happens, the gold rally probably will be over for now.

The 200d MA (US$976.88) still indicates a bull market and probably will be seen in the spring as a line of support when the traditional spring correction occurs.

The following 4h chart shows the lower support line around which gold is currently oscillating.

The following Point and Figure Chart graphs the last 25 years. It always amazes me how well these kinds of charts work. With this chart, you would have had no sell signal until last Friday and could have made nearly US$200 in the last up move since the low at US$1,025.

The ratio for the Dow Jones Industrial Average gold price is 8.94. The stock market is not yet out of the woods, and we could see a continuation of this sideways movement. Also, there is the typical year’s end rally around the corner.

Very long term, I expect the price of gold to move towards parity to the Dow Jones (=1:1). The next primary cyclical change is still years away. This means we are still in a long term bull market in gold (and also commodities) and in a secular bear market in the broader stock markets.

Gold in EUR (one ounce = 782.40€)

Gold in EUR started the correction as well last Friday, but further downside risk should be limited.

Already the mid Bollinger Band (770€) is good support. If that level does not hold, then we should see a bottom around 740-750€.

The 50d MA (731€) and the 200d MA (694€) are far away and rising slowly. 

The current correction is probably the last opportunity to accumulate gold well below 800€.

Goldbugs Index USD (470,90 points)

The chart of the HUI is less impressive than the chart of gold. The sell-off on Friday was severe. A pullback around the all-time high at 520 points was to be expected as mentioned in the last issue, but the performance of the gold mining stocks is pretty disappointing. Due to the miners’ high volatility, gold mining stock investors have not had it easy; however, if gold rises to US$1,600, their patience and strong nerves will be rewarded.

The area around 460 points is a very strong support—it should hold. But you can also expect that new HUI highs will take some time. It is most likely that HUI will consolidate between 460 and 510 for a while.

But, of course, one can also interpret the disappointing performance of the HUI as a negative signal for the current gold rally. But as long as gold holds above US$1,135, I think this point has low relevance.

Another negative point is the rising RSI–divergence and exhausted MACD/PPO indicator on the weekly chart.

Gold COT Data

Although gold went up more than US$200, the commercials really did not increase their short position significantly. The sell-off on Friday probably was already used to cover some positions.

04/18/2009 = -153,419 (PoG Low of the day = US$885 )
05/26/2009 = -208,136 (PoG Low of the day = US$939 )
06/02/2009 = -226,521 (PoG Low of the day = US$970 )
07/14/2009 = -182,287 (PoG Low of the day = US$917 )
08/04/2009 = -228,193 (PoG Low of the day = US$950 )
09/01/2009 = -216,708 (PoG Low of the day = US$940 )
09/22/2009 = -287,610 (PoG Low of the day = US$1,012)
10/06/2009 = -281,864 (PoG Low of the day = US$1,035)
10/13/2009 = -295,926 (PoG Low of the day = US$1,055)
10/20/2009 = -297,493 (PoG Low of the day = US$1,051)
11/03/2009 = -283,852 ( PoG Low of the day = US$1,054 )
11/10/2009 = -282,784 ( PoG Low of the day = US$1,095 )
11/17/2009 = -281,546 ( PoG Low of the day = US$1,126 )
12/01/2009 = -308,231 (PoG Low of the day = US$1,190 )

Gold Seasonality

Seasonality is still positive and supports higher prices within the coming months.

Gold Sentiment

Some commentators have already interpreted the current correction as the end of the gold rally. The sentiment indicator is changing quite quickly here. It is necessary to cool down sentiment before the next up move can start. 

Conclusion

The next big up move in the multiyear gold bull market has been underway since late August. We will see much higher prices in the coming weeks and months. My price targets have not changed: US$1,250 until the end of the year and US$1,600 until spring next year. Every pullback is an opportunity to buy. The volatility will increase dramatically. Intraday moves of US$50 - US$100 are realistic and to be expected.

Looking forward in the short-term, I expect a triangle or some form of consolidation pattern to develop between US$1,212 and US$1,140. Gold should not move below US$1,135 anymore. 

About the Author: Florian Grummes (born in 1975 in Munich) has been studying and trading the Gold market since 2003. Beside a lot of self-development workshops and seminars his experience in the gold market comes from trading and investing his own money to finally become a very successful self-employed precious metals trader and investor. Along with his trading business, he is also a very creative and successful composer, songwriter and music producer.

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Trading Tip

A Tale of Two Markets – Part IV

 by 

D.R. Barton, Jr.

“Nowadays people can be divided into three classes: the haves, the have-nots and the have-not-paid-for-what-they-haves.”

“If you think nobody cares if you're alive, try missing a couple of car payments.”
— Earl Wilson quotes

Our continuing tale of two markets brings us today to the credit markets. Previously, the credit markets were a well-oiled machine that Joe and Mary Sixpack never even thought twice about. Credit was freely available to anyone for anything. Need a new house? No problem! New car? You betcha! Can't afford a stove, a couch or a new flat screen? We’d love to help finance it for you! Shoot, we’ll even finance your Fruit-of-the-Looms if you just sign up for our Macy’s charge card today! (Or K-Mart, Wal-Mart, Sears, etc.)

While this bucolic scene played out all over the industrialized world (and in most of the emerging markets) over the last few years, a funny thing happened on the way to the credit card rollover—the real estate market collapsed. For most of the last year, it was tough for individuals or companies (large or small) to get a loan. That problem has lessened for one group only but unfortunately not for the other.

So far in this series of articles, we have looked at discrepancies between the stock market involvement of institutions and retail investors. And while those differences are striking (especially the reluctance shown by retail investors to re-enter the market), there's an even more significant difference in the credit markets. 

In short, big companies have easy access to huge amounts of very low cost debt, while small businesses and individuals find their ability to borrow very challenging. 

Big companies have to be reveling in their ability to tap into ultra-cheap capital. Cisco just raised $4.5 billion in corporate debt. It sold $2 billion worth of 30 year bonds with a yield just 135 basis points (1.35%) higher than 30 year U.S. Treasury bonds, and $2.5 billion of ten year bonds at a mere 100 basis points above 10 year Treasury notes. That is some very cheap money! While Cisco’s credit rating is very good, it is not at the top of the heap. (Moody’s rates them A1, three tiers from the highest rating.)

This tightening of the credit spread between government and corporate issued debt shows that investors are ascribing very little risk of default to companies and requiring very little risk premium from them. This is a huge change from just 6 – 9 short months ago.

While this may fuel short- term spending and can lead long-term growth, it also presents another more daunting possibility—the return to problematic risk taking by large companies. Stung by significantly reduced revenues, companies could be enticed to turn to this low-cost pool of money and use that to fuel higher risk endeavors. This is not a given, but it does stand as a distinct possibility that should not be considered. 

The easy access to low-cost money for big companies stands in stark contrast to the difficulty that consumer and small businesses have borrowing any money at all right now. How bad is it? It’s easier to find a great review of a Jonas Brothers album than it is for a small business or person to get a loan.

The following statistic reveals the depth of problem: according to Barron’s, consumer credit fell 4.8% in September—the steepest annual decline since World War II. And this wasn’t a one-time blip but rather an acceleration in declining consumer credit: year-over-year numbers were down 4.1% in August and 3.9% in July.

Perhaps more disturbing is that commercial and industrial loans have been falling at an even greater rate—down 10.6% this September versus last, with October off a whopping 16.2%—setting another new post World War II record for tightening of credit.

The bottom line is that the tremendous equities rally we’ve seen cannot be sustained over a longer time frame with these two very different credit market conditions. One where the hogs of corporate America have their snouts firmly thrust into the government’s trough of high liquidity and easy credit, while the little piglets (consumers and small business) can’t even find a few crumbs of credit lying around.

Until the credit bifurcation resolves itself, there is no sustainable recovery, only a sugar high in the equities markets. There’s a lot of sugar though and there’s no indication that it’s about to run out anytime soon. 

Until next week…

Great Trading!
D. R. 

About D.R. Barton, Jr.:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  "drbarton" at "iitm.com".

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Trading Game Question

Q: I have played your Secrets of the Masters software multiple times. In level 7, you note that you can let your profits run because you are using a system where probabilities go in your favor with a winning trade. How are you testing systems to see if they have this characteristic? I understand these are trend following systems. Do you consider an initial winning trade any trade in which the stop is moved to lock in profits and lets you reinvest them in the same trade (i.e., pyramid)? 

A: Thank you for your business and for your question— it's one that we hear often. Keep in mind that this game is an exercise in position sizing, not entering trades. In level 7 of the game, a winning trade indicates the start of a price run—or a trend. Your job is to determine how much risk you want to leave in the trade. Do you risk the entire amount of your gains and let it ride, or do you take some off of the table in case the run (trend) ends? 

You can relate this to using a trailing stop or tightening up your stop as the trade continues to move in your direction. If you left the original stop where it was and the price moved up, you'd be leaving more and more profits at risk as the price went up. By leaving your stop at its original level, you increase the open risk as the stock price goes up and you actually decrease your risk to reward ratio for the trade as the price continues to move. If, however, your stop trailed the rising price or you even tightened up the stop as the price rose, you would be protecting more of your profits—even while you let it run. In the current game, you do not have the ability to scale in or pyramid your initial position. In the new version of the game (coming out soon), you will be able to allow for trading mistakes, trade commissions and taxes. 

Have fun playing and good luck.

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