Wednesday, September 23, 2009
Gold - Technical Position Piece
I love fractals, or repeating patterns in markets, to try to predict what comes next. They don't always work and sometimes they fail miserably, but they let you know what's possible and what has happened in the past with similar chart set-ups. Since we're all just guessing in the short and even intermediate-term, it's nice to try to pretend that a technical crystal ball has merit. I'm just a dude with an opinion (which has been off relative to the market lately, so grains of salt all around), but I still like the 2005 time frame as a potential rhyme.
This implies a brief period of Gold strength here to make new highs, then consolidation to confirm the new highs and establish $1000/oz. as a new floor for the Gold price. I'm not wildly bullish on Gold right here and right now, but I am bullish. When one anticipates stocks, corporate bonds, real estate and commodities are going to take the kind of plunge that will make widows and orphans cry, there are only two choices: get short or get out of the way. U.S. Dollar cash is a good trade here on an intermediate term basis, regardless of what the Dollar permabears think, and Gold is just another way to stay out of the casino. With only 3% bulls on the Dollar and oversold conditions, the risk is to the upside in the Dollar, not the downside, regardless of fundamentals (which have nothing to do with short or intermediate-term swings in ANY market).
If Gold can hang around $1000/ounce, I'll be very happy, as this means the "real" price of Gold will be rising and Gold miner profitability will be rising. The only stocks I am bullish on over the long term are Gold stocks. Period. Gold stocks are a deflationary play for the current cycle, not an inflationary one.
Anyhoo, here's the action of the U.S. Dollar versus price of Gold during the mid-2003 to late-2006 time frame using a daily chart (Gold is a candlestick plot and Dollar is black line plot):
And here's the Gold miners (using $HUI index as a proxy - the black linear plot) versus Gold (candlestick plot) during this time frame:
Now, this is not a wildly bullish proposition. Anyone hoping Gold is going straight to $2000/oz right here and right now is going to be disappointed in my opinion. However, staying around $1000/oz. while the stock market is cut in half makes Gold a pretty good option in my mind! Nimble traders can instead try going long the U.S. Dollar, but I hold physical Gold as a long-term investment rather than a trade. I get plenty of exposure to Dollars by existing in America. Gold miners are risky here, though they could easily move a little higher before a correction. I wouldn't be putting new money to work in senior or even medium sized-Gold stocks here. Juniors march to their own drummer and oversold junior Gold miners are oversold, not necessarily risky.
When the stock market tanks (and it will), it will take most Gold stocks with it. Period. When the real turn comes in risk-based assets, it ain't gonna be some gentle 10% correction and then the bull market resumes. It is going to be another wicked leg down in the ongoing cyclical and secular stock bear market that is far from over. I am very bullish on Gold stocks and Gold over the long-term, but believe caution is warranted for those who aren't in it for the long haul. Any surprises in the short-term should be to the upside, but every anti-dollar play out there is getting VERY long in the tooth on an intermediate-term basis and the pending 6 month return for the U.S. Dollar may well be higher than for Gold. Over the long haul, I maintain my thesis that Gold will continue to outperform the U.S. Dollar (and all other fiat currencies).