Don’t Believe the Chart: Gold Still Looks Promising
While I do like gold, I’m somewhat perplexed over the metal’s near-term stock chart. The chart shows indecision and indicates a potential downside break at $1,550, with gold potentially falling out of its current sideways channel.
And it also appears that the professional money has mixed feelings about gold. Famed investor George Soros cut his gold holdings, but Paulson & Co. made no changes. (Source: Rooney, B., “Soros dumps gold as prices sink,” CNN, February 16, 2013, last accessed March 12, 2013.)
Despite gold’s reputation as a safe haven to stash your money, there is a lack of buying interest across the board, as the sentiment toward gold is rapidly declining; hedge funds are selling.
So, is a major downward move on the chart coming?
In my view, gold is at a crossroads. It could continue to trade in its sideways channel, where you can simply buy on weakness down to $1,550 an ounce and sell on rallies.
While I agree the near-term risk is high and could see prices move downward toward $1,500 an ounce, any major declines in gold prices should be viewed as a potential opportunity to accumulate gold as a contrarian investment, especially if the eurozone mess intensifies and an asset bubble surfaces in China (which is also seeing a dangerous rise in inflation to 3.2%). The problem in China is that the new government’s strategy to drive consumer spending to spur economic growth will only add to the inflationary pressures and overall market risk that are already present.
I also sense that the market is underestimating the major debt and growth situation in Italy and the muted growth in Germany and France. Countries like Italy, Spain, and Portugal cannot continue to pay high yields on their bonds, which are just not sustainable.
And then you have the excess liquidity being pumped into the monetary system by the Federal Reserve and central banks around the globe. The low interest rates dilemma is a major reason why stocks have done so well. What happens when rates begin to creep higher? Gold looks better in a rising interest rate climate.
In my view, gold continues to be a place to park some capital; for this reason, I feel the metal will continue to attract support above $1,500.
The chart shows sideways trading with major support around $1,550 and upper resistance at $1,800, as indicated by the horizontal blue lines in the stock chart below. Within this trading band, there’s a downward trading channel, as indicated by the downward-sloping blue lines. The surfacing of a bearish “death cross” on the chart is a red flag. The near-term picture is bearish on extremely weak relative strength, so the key is support.
We saw a similar situation in February–May 2012, prior to a rally back to the upper-band resistance. I’m not saying this will happen again, but the recent trading action suggests this.
Should gold falter back to $1,550, there may be an opportunity to buy; but be careful, and watch for a breakdown.
Chart courtesy of www.StockCharts.com
For these reasons and others, gold will remain a great place to stash money in spite of what some pundits and the media are saying.
So while the near-term prospects for gold look somewhat dull, I see downside moves as potential opportunities to add to existing or new positions.