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Golden Moves

The fundamental reasons gold is rising are numerous and have been discussed over and over on this site and elsewhere: ultimate store of value, jewelry demand from the Far East, awareness from a new audience due to the gold ETF, the end of the world, etc. Personally, I subscribe to the theory that gold is still being treated by investors like any other commodity, which are broadly floating higher on a sea of global liquidity and increasing wealth (while central banks around the world may serve to undermine it, the world does continue to grow richer).

Despite its recent push to 20-plus year highs and fundamental arguments aside, technically speaking there remains reason to believe this move in gold continues to hold longer-term implications. On a point and figure basis, the recent relative strength readings for gold have continued to indicate many more calendar months of strength. Historically, such signals last 2 years or more and gold has recently re-confirmed such strength.

In fact, when you look at the 1990's and compare the performance of the S & P 500 (up 288%) to Gold (down nearly 25%), it's no surprise to learn that the relative strength of London Gold was on a sell signal from December 1990 to July of 2001! It shouldn't be unreasonable, then, to suspect gold's current relative strength out-performance to last longer than usual; while gold's relative strength readings over the last 3 years have actually vacillated between buy and sell signals, London Gold's most recent action compared to the S & P 500 was a buy signal on October 11, which could be the one that lasts.

Further, gold of course turned in a powerful upside move last week along with many of its base metal cousins. Though it may surprise some, it looks like the consolidation of gold's initial break above $500 may already be over; in fact, on a technical basis it looks like little more than a normal pause in an orderly up-trend. Indeed, last Friday's move through $538 foreshadows a potential move to the $600 - $610 range.

One word of caution here: in the short term, gold remains very overbought, even more so after the latest breakout. In fact, London Gold itself is almost 100% overbought when compared to its own price action history while many gold and precious metals mutual funds are 200% overbought on the same basis.

Despite its continued strength on a technical basis, there could possibly be a couple of uncomfortable near-term scenarios for gold's next act. First, it has to be acknowledged that should it reverse course, it might be early in the process of putting in a double top, possibly one of great significance. Second, it could essentially stand still for a bit to consolidate its recent gains, albeit in a choppy range that could spur holders to reach for the Dramamine as a result.

However, it simply would not surprise me if it kept rising as I do suspect that gold investors are emboldened now and will push it to an even more overbought condition with this latest break. Conservative investors, of course, will likely want to have the price come back to them before committing and should wait for some sort of pullback before taking action on the long side. Based on the strong relative strength, however, it seems it would be wise to use any weakness to accumulate the metal, particularly with downdrafts to the $500 level.

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