Gold Lacks Relative Strength
Gold is not going to breakout anytime soon. Its relative strength or lack thereof, is the chief reason. Gold has been rising recently, only due to the positive tide in most markets. In the chart below, you can see that the various ratio charts have formed a negative divergence to Gold. Gold has not only been weak against commodities and stocks but also foreign currencies. On the positive side, the ratio charts have formed a serious long-term positive divergence. Relatively speaking, Gold has bested its 2008 highs in most forms, but not in US dollars.
Gold must regain relative strength before we become short-term bullish or project an imminent breakout. Remember that Gold often is a leading indicator. Last year the initial breakdown in Gold and gold stocks occurred in July and August while for common stocks, the big break began in the second half of September. Gold and gold stocks began to recover in late 2008. Months later, common stocks recovered.
Look for the sector to regain some relative strength once common stocks and commodities turn down. This may take some time though. Even though we are in the historically positive seasonality period, we should take note of the past few years. The bottoms occurred in October (2006), August (2006) and October (2007). And the bottoms occurred after sharp selloffs.
Nevertheless, the intermediate technicals remain healthy. Oddly, short and long-term volatility levels are conducive to a breakout, yet intermediate term levels are not. We've been looking for the 40-week bands (intermediate) to close and that has just begun. That should accelerate into the fall.
To conclude, relative strength more so than an absolute support level, is more likely to play a role in where and when Gold bottoms. The bounce in the US dollar has legs and will hurt all risk assets. It will hurt Gold the least as Gold has basically advanced only a few percentage points since the dollar peak. That is how/when Gold will gain back relative strength.
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