Bullion surges to 6-month high


The value of gold plunged 28.3% in 2013, bringing to a screeching halt the yellow metal’s 12-year win streak. With increasing numbers in 2013,  analysts put their bear claws into gold and declared the bull market over.  Just this past January Reuters news service, in an article titled “Gold bull market ‘firmly in rear view mirror’,” reported about its survey of 37 analysts whose consensus forecast is for gold to finish 2014 at $1,235/oz.

Well, gold bullion is off to its best start to a year since 1983, closing today at $1,367.30/oz. SPDR Gold Shares (GLD), my proxy for the gold market, is up 13.4% so far in 2014. While gold has certainly been a beneficiary from uncertainty surrounding the Ukraine-Russia conflict, the metal has actually been climbing since late last year. In February GLD recorded its first monthly inflow since December 2012.

As you can see on my chart, gold found its footing in December, surpassed its intermediate-trend 50 day average in January, and then topped its longer-term 200 day average in February. If current strength continues, a “golden cross” will take place where the 50 day average moves above the 200 day average – a technical pattern which often ushers in a period of higher prices.

Regardless of how gold performs in the near, intermediate or long term, I’m a proponent of maintaining a small investment allocation to bullion as a hedge during economic uncertainty. We only need look back to the 2007-2009 bear market in US stocks when the S&P 500 fell 56.8% from peak to trough while GLD, on the other hand, surged 23.9%.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. 

Yellow metal’s mixed picture

SPDR Gold Shares (GLD)What goes up, must come down and so it was that after 12 consecutive years of strong returns, gold bullion went into a tailspin in 2013. By April, after dropping more than 20% from its August 2011 high of $1891.90, the yellow metal officially entered bear market territory. Prices continued to weaken through the spring months with gold eventually bottoming late-June at a 34-month low of $1,179.40 an ounce. Headlines throughout the first half of the year declared that the gold bubble had finally burst.

Funny how in late-August, when geopolitical tensions in Syria propelled gold bullion back into bull market territory, you could hear the sound of crickets coming from the financial media. Sure, the rally may end up being nothing more than a dead cat bounce, but the so-called “smart money” (hedge funds and money managers) has accumulated the largest gold futures and options position since January, according to the US Commodity Futures Trading Commission.

Looking at the one-year chart of SPDR Gold Shares (GLD), my proxy for bullion, you can see gold gaining traction in July, pulling back, then resuming its uptrend in August while forming a higher-high, higher-low pattern. My intermediate-trend strategy for trading the yellow metal triggered a buy signal on July 24 when GLD closed above its 50-day average – a move confirmed by my momentum indicator. (The July buy signal followed a quick, unprofitable round-trip between 1/23/13 and 2/1/13.)

Going forward, gold faces a serious headwind from a technical perspective — the bold blue multi-year support line is now resistance. GLD’s 200-day average also has the potential to behave as a barrier to higher prices. But in the meantime, seasonality is on the metal’s side: since 1969 September has been the single best performing month for gold with an average 2.3% return. I’m enjoying the ride, but keeping a very close eye on the exit door.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. 

 

Metals meltdown

Spot Gold

Gold took a big hit last week, dropping 4.7%, and now just about every financial news website that I visit contains an article proclaiming the end to gold’s 12-year bull market.  I’ve seen this movie before.

A New York Times story warned us in May 2006 that the yellow metal could be a bubble about to pop after prices plunged 4.9% in one day to $678.70/oz.  Economist Nouriel Roubini, who rose to fame by predicting the 2008 credit crunch, cautioned us about gold in 2009, saying it “looks suspiciously like a bubble” In his article The Gold Bubble and The Gold Bugs, Roubini also suggested that gold bugs instead “stock up on guns, canned food, and other commodities that you can actually use in your log cabin.” And in January 2010 when gold was trading at $1,087/oz, hedge fund legend George Soros said that bullion was “the ultimate asset bubble.” Gold went on to close at a record $1,886.40/oz on September 2, 2011.

Now, with gold plunging 20.4% from its all time high to $1501/oz, has the bubble finally burst? Well, gold corrected 22% in 2006 and 29% in 2008, so the current pullback – while unnerving – isn’t atypical.

Having said that, there’s been a fair amount of technical damage inflicted on this particular precious metal. My strategy for managing downside risk has only spent seven trading days in SPDR Gold Shares (GLD) since early-December 2012.  In addition, in mid-February gold’s intermediate-trend 50 day average crossed below its long-term 200 day average in a pattern called a Death Cross that often foreshadows big drops. And finally, Friday’s $63.50/oz free-fall wiped out strong support (blue line on chart).

While my outlook over the next several weeks to months is extremely cautious, I’m expecting gold to eventually regain its lost luster and I’ll be a buyer when risk normalizes. For now, however, my Gold reading: Bear Market.

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Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog.