The Gold Trend

Ok, I figure this article upsets the apple cart in the gold bug community but figured that gold was worth looking at. After all, if it rallies or falls, someone is talking about it, various stocks and sectors respond to it and enough chatter follows. On Friday, it came very close to breaking a major, major, major support but bounced. So the question is: where does it go from here? Well, lets analyze this technically, like I did with crude the other day. Before we begin though, the process that I use to determine golds trend is three fold. First, from a day to day trading perspective. Second, from a long term chart perspective and third, from and inflation perspective.

First, from a day to day standpoint, gold is very oversold. One of my indicators shows the yellow metal is the most oversold since the collapse from 1000 in March. One could look at this one 2 lights. First, gold never recovered from these highs or conversely, maybe the second time is a charm and the metal rallies? Personally, I think it is a change in sentiment. Before the major fall off in March, we had not seen a sell down as aggressive as that plunge from 1000 since June of 2006 which is basically almost 2 years prior. Now we have two of them within 6 months? I know that index funds have been unloading these positions which explains why we have not bounced. the problem for gold though is that it took a long time for the funds to get into the commodity market. If they are dumping today, when will they come back? It won't be tomorrow!

From the chart side of this equation, we bounced right in front of both my intermediate and long term support position which resides at 850 (low as 857, finished at 864). I would argue that since we are here, a test of 850 will probably occur and if it breaks, the next level of support resides around 770. For those of you keeping track at home, that would be a 25% decline from March. In between that though resides the mighty 65 week at 825 and the mocu cloud below at the 770 level. So on the positive side, I think the waterfall might be coming to and end. Does it mean we rally? Not quite. Interestingly enough, gold leads the CRB so if gold falls 25%, raw material prices will be falling probably just as aggressively.

Finally, from the economics side, the prices model is moderating now from its ultra high levels of a few months ago. Continued moderation is not supportive for gold to shoot higher. Easy monetary policy, which we currently have is supportive. Generally easy money with rising prices argues for higher commodities. I am not saying that gold can't move up. I am saying though that the pricing pressures of yesterday are now unwinding and it appears that overnight policy, looking forward now, is tightening. This is not supportive for assets - or gold. Oh, did I mention that the dollar is in breakout mode? All of a sudden the prices of our assets becomes a bit more expensive for the global consumer to buy = less demand for commodities and thus more deflationary pressure.

So the bottom line is simple. There are bullish factors supporting at least stabilization in the gold price. The yellow metal is oversold and as long as 850 holds, I could see the bulls mounting a stand of some sort. Longer term though, things do not look so promising and if today's trends continue into tomorrow, gold could be on its way back towards the 600 level or even lower, depending on how far this dollar rally exerts itself (my projection of 82.50 should put gold around 600 if historical trends hold).