Based on the August 12th, 2011 Premium Update. Visit our archives for more gold & silver analysis.
Events have been moving so quickly recently that one can barely catch one's breath. Did we mention that nothing is supposed to happen in August? This is the month that the "sell in May and go away" crowd heads out to the beach or the mountains. Just for your information, history shows that August is not all suntan lotion and poolside cocktails.
It was in early August of 1914 that World War I broke out and twenty-five years later, in August 1939, the Molotov-Ribbentrop pact between the Soviet Union and Nazi Germany was announced. On the night of August 31, Adolf Hitler ordered the German army to attack Poland. In August of 1945 The U.S. dropped an atomic bomb on Nagasaki. The United States entered the Vietnam War, authorized by the Gulf of Tonkin Resolution in August of 1964. The Prague Spring in Czechoslovakia was crushed when the Soviet Union and its Warsaw Pact allies invaded in August 1968. In August 1990, Saddam Hussein's Iraq invaded Kuwait precipitating the first Gulf war. A year later, in August 1991, a coup was under way in the Soviet Union and within days, the Soviet Union begun to break up.
And if you think bad things happened in August only in the modern era, we need only point out that August 28th, 476 was the last day of the Roman Empire. Perhaps T.S. Elliot got it wrong and it is not April that is the cruelest month, but rather August.
With the events moving at such a pace, let's jump right into technical part of today's analysis. We will start with the very long-term gold chart (charts courtesy by http://stockcharts.com.)
In the above chart (if you're reading this essay on our website, you can click on the above chart to view its full version), the recent incredible ride is clearly visible even from the very long-term perspective. Because of the size of the rally, it is critical that we view it from a proper perspective and clearly the very long-term chart is invaluable for this purpose. It allows us to properly analyze recent important developments.
It is of great importance that we note the resistance levels, which are now very much in play. The red line in our chart represents the long-term rising trend channel and gold's price has broken above this level but the move has not been confirmed at this time. In fact, gold's price appears now to be reversing back to the trend channel once again.
The resistance level created by the 2002 low and the highs of 2008 and 2009 (these highs and lows have been extrapolated with the use of the Phi number), and the upper border of the accelerating trend channel (dashed lines in chart) stopped the recent price rise of gold slightly above the $1,800 level. Gold's price is now close to the upper border of this smaller accelerated trend channel and a resistance level therefore is in play.
The current RSI level indicates an overbought situation and, in the past, this has usually been followed by a decline in gold's price. Volume levels are also giving a similar signal. This has often coincided with local tops in the past. Normally, a quick downturn usually follows. It does seem that we are now at a local top for gold or very close to it.
On August 12th, in our essay on gold & the stock market, we suggested that (...) looking at gold from the perspective of the Japanese yen we have an extremely overbought situation based on the RSI level and a long-term resistance level also in play. (...) a local top appears to be upon us. We also argued that (...) it is important to note that when multiple perspectives and tools all point to the same general outlook, it greatly increases the odds of the outlook being right on.
In order to broaden our perspective, let's take a look at the long-term gold chart from a non-USD perspective.
In this chart, we have a confirmation of points made previously. The non-USD price index for gold has moved to a resistance level after breaking out last week. In addition, the RSI level here is also in an overbought range and this has normally indicated a sell signal in the past.
In the short-term GLD ETF chart, the situation is not nearly as clear mainly because the recent moves have been so huge. It does appear that gold's momentum has been broken as prices declined with significant volume levels on Thursday. However, in our opinion the situation is not overly bearish from this short-term perspective. In the past, similar signals would often lead Investors in the wrong direction, so it is important to use numerous tools before drawing conclusions upon which to act.
Summing up, the analysis of gold volume levels does not give significant details this week from a short-term perspective. The weekly volume levels seen in the long-term gold charts, however, and the analysis of RSI levels suggest that gold is overbought. This is true from a non-USD perspective as well as from the dollar side. Furthermore, the overbought situation comes at a time when price levels are at or near very strong long-term resistance lines. It does appear that we are quite close to an important top (or we have already seen it) and long positions in gold at this point seem very risky at least for the short term.
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Thank you for reading. Have a great and profitable week!
