Gold enjoyed a strong August after emerging out of its late-July
seasonal lows. But interestingly
last month’s bullish action was probably just the beginning of gold’s newest rally. A whole host of bullish seasonal,
sentimental, and technical factors are converging that ought to catapult gold
much higher in the coming months.
In seasonal terms, autumn is the strongest time of the year for the
ancient metal of kings. Big
surges in gold investment demand emerge out of Asia. The initial one is post-harvest buying
once Asian farmers learn how much surplus income their hard work generated in
the latest growing season. They
invest some of these savings in physical gold. Harvest time for them is like year-end
for Westerners, when we figure out how much money we’ve earned beyond
our living expenses.
After that, Indian festival season kicks in. India
is the world’s largest gold consumer, and its autumn festival season is
considered the most fortuitous time for young Indians to get married. Their culture believes the timing of a
wedding affects a marriage’s longevity, happiness, success, and
luck. Families of Indian brides
spend fortunes to adorn them with intricate 22-karat jewelry. These dowries provide more than
beautiful adornment, gold’s intrinsic value helps secure the
bride’s financial independence in her husband’s family.
Thus gold’s seasonals are very strong this time of year, so it indeed
tends to rally every autumn like clockwork. But seasonals alone are not enough,
they are ultimately a secondary
influence on gold prices. More
important is short-term sentiment and technicals. If gold comes into autumn drenched in greed
and wildly overbought, the odds favor it correcting regardless of seasonal
tendencies. Thankfully just
the opposite is true this year.
Heading into autumn 2010, there has been little enthusiasm for gold
and it has lingered far closer to oversold levels than overbought ones. Thus sentiment and technicals favor a
big autumn gold rally this year, while seasonals provide strong tailwinds
that make gold’s outlook even more bullish. Actually, the sentimental and
technical scene today is the best setup for a big autumn gold rally
I’ve seen in years.
To flesh out today’s strong foundation for a major gold rally in
the coming months, let’s start with technicals and then move into
sentiment. Price action
ultimately drives sentiment, traders get depressed when prices are relatively
low and euphoric when they are relatively high. Despite gold challenging new all-time
nominal highs this week, believe it or not this metal is actually relatively low technically!
This chart presents a combination of gold technicals and an indicator
I created many years ago called relative gold. Relative gold is rendered in red and
slaved to the left axis. It
expresses gold as a constant multiple of its 200-day moving average. Graphed over time, this creates a horizontal
trading range showing when gold is relatively high (overbought) and
relatively low (oversold). If you
are not familiar with Relativity trading theory, read one of my essays on it to get up to speed.
On this chart, gold’s recent price levels look pretty darned
high compared to the last few years.
But amazingly, gold is actually fairly
cheap today technically.
How? All price action is relative. Back in autumn 2005 for example, when
gold first broke over $500 in this bull, that level looked stupendously
high. But today this very same
$500 level seems end-of-the-world low.
Throughout the course of any secular bull, ever-higher baseline prices are the norm. And relative to its latest baseline,
gold is cheap.
Gold first broke over $1200 this year in early May, actually on the
very day of the infamous Flash Crash.
Extreme fear drove a deluge of panicky stock-market capital into the GLD gold ETF. Demand
from stock investors for GLD shares was so high that this fund’s custodians
had to buy almost 20 metric tons of gold that day to keep their ETF from
decoupling to the upside from the metal.
This huge 1.7% GLD holdings build drove a 2.8% rally in the gold
price, propelling it over $1200.
Since that fateful day just over 4 months ago, gold has averaged $1216 on close. Whenever a price consolidates sideways
near highs, it forms a base. And
the longer any price level persists, the more traders grow comfortable with it
and accept it as the new baseline norm.
So $1200 no longer feels expensive, but typical. This is a far cry from the way $1200
was originally viewed in December 2009 the first time it was hit.
Last year’s impressively big autumn gold rally that drove the
first $1200 sighting ever is
readily apparent in this chart.
Some technicians even measure gold’s current base back to those
days over 9 months ago. While
$1200 felt unsustainably high and risky then, thanks to gold’s
subsequent high consolidation this same level merely feels normal today. Gold’s latest $1200+ base is
well-established psychologically.
And this behavior is typical.
As you can see in this chart, gold tends to consolidate sideways
during its summer doldrums. This
gives traders plenty of time to grow comfortable with new prevailing price
levels. And then once autumn
arrives, gold tends to shoot higher on the back of strong global investment
demand. This cyclical behavior is
very common in gold, only interrupted by the crazy anomaly of 2008’s
epic stock panic.
Back in the summer of 2007 (market summers are calendar June, July, and August), gold averaged $662 on
close. Yet after its big autumn
rally, gold’s monthly average in December shot up 21.8%. Something similar would have likely
happened in the autumn of 2008, but that crazy once-in-a-century stock panic
drove such staggering levels of fear that it short-circuited gold’s
seasonal cycles. Nevertheless, gold
made a very fast recovery after the panic and has powered higher in a strong
uptrend ever since.
In the summer of 2009, gold again consolidated sideways and averaged
$943. It was kind of funny, as
late that July this metal’s sentiment was very bearish near its
seasonal lows. Most analysts and
traders expected a big selloff.
But as a contrarian I pointed out at the time that gold was finally
poised technically for its long-awaited decisive breakout above $1000. It was
basing before a big autumn surge.
I was later proven right while the naysayers were wrong, in December
2009 gold averaged $1127 (19.5% higher).
Then in the recent summer of 2010, gold averaged $1215. Between the summers and Decembers of
2007 and 2009, the average gold price surged up in a tight 20.7% gain. If we see a similar autumn rally this
year, which is likely, gold will average $1466 in December 2010. Since this is just a monthly average,
the odds of seeing $1500 this autumn are actually rather high. And anything above today’s
prices is easily new all-time-nominal-high territory, which will do wonders
for this metal on the sentiment front.
In relative terms, the odds for such a big autumn rally this year are
even better since gold is low in its trading range. Over the past 6 years or so, gold has
tended to gradually oscillate in a horizontal range between 0.99x its 200dma
on the low side to 1.25x on the high side. Gold is cheap when it is low in this
range, the time to be long. Gold
is expensive when it is high in this range, the time to be short.
In late July this year at its seasonal low, gold fell so out of favor
that it hit 1.015x its 200dma.
This is actually very similar to what we saw in August 2007 (0.998x)
before that year’s big autumn gold rally. Gold has not been remotely close to
being technically overbought or even overextended since way back in early
December 2009 when it first hit $1200 (at 1.248x its 200dma). This pattern of starting the autumn
rally near gold’s 200dma and ending it stretched 25%+ above this key
metric is typical.
Today gold’s 200-day moving average is near $1165. To stretch 25% above it and enter the
greedy realm of overboughtness, gold would have to hit $1456. And realize that as gold marches
higher in the coming months, this 200dma baseline will gradually rise as
well. By December as the autumn
gold rally winds down, seeing gold overbought at 1.25x its 200dma could very
well be at a price around $1500.
So in a pure technical sense, gold is looking very bullish today. Despite being near all-time nominal
highs, it isn’t overextended at all. $1200+ gold is the new norm, first
seen in December 2009 and enjoyed continuously on average since early May. Gold is entering autumn near the
bottom of its relative trading range, not far above its 200dma. It will take a lot of buying, and the
resulting rallying, to drive this metal back into the overbought territory at
the top of its relative range.
Once again, price action drives
sentiment. The reason traders
aren’t very excited about gold today is because it essentially
hasn’t made any progress since either May or June (when $1256 was first
hit), depending on one’s perspective. While sideways consolidations generate
comfort with and acceptance of new prevailing price levels, they never spawn
any excitement. Consolidations
bore traders into apathy.
Given today’s overwhelmingly apathetic sentiment, traders’
near-term outlook on gold has a long ways to improve. And the only thing that can do it,
start to bring back excitement and eventually greed, is for gold prices to
continue rallying higher. Gold
surged 5.5% in August, which certainly made a favorable impression on many
traders’ radars. As this
rally continues, gold will break into super-important psychological territory.
In real inflation-adjusted terms, January 1980’s all-time gold high was around
$2400 in today’s dollars.
So gold isn’t even close to a new real high yet. But few
think in real terms, so the headline nominal price is all that matters
psychologically. And gold is
right on the verge of heading into new all-time-record-high territory in
nominal terms. It first hit $1256
in mid-June, so anything materially above this will represent new all-time
highs. Traders and the
media love new highs.
All-time highs in any asset draw a lot of attention to it. The media reports on that asset
excessively and tends to extrapolate its strong performance forward. Countless traders who weren’t
interested in the asset before get really excited about new record highs and
start chasing the momentum. They
deploy capital, which drives the asset even higher, getting still more
traders interested. Thus new
all-time highs often form a virtuous circle where favorable psychology drives
expanding buying which feeds on itself.
The $1300 gold coming soon is going to be big mainstream financial
news. $1400 will be even
bigger. And when we hit $1500,
this nice round number will make record gold highs mainstream general news. Realize all this gold excitement will
be multiplying at a time when individual investors remain scared of the stock
markets and cowering on the sidelines in record amounts of cash (literally trillions of dollars). If even a small fraction of that
starts chasing gold, we’ll see a massive spike well beyond the usual
big-autumn-rally standards.
Anecdotally, in my little physical world I’m amazed how many
people I come across that are getting really interested in gold for the first time. At Zeal we and our subscribers have
already made fortunes in this bull, starting to buy physical gold coins in
May 2001 ($260s gold) and riding the epic rally in precious-metals stocks
ever since. So gold is certainly
no longer new to contrarians like us who have been investing in this secular
bull for a decade.
But this metal is still new to
most, an asset the great majority of mainstream investors have yet to
touch. New record gold highs
during today’s anxious stock-market environment will really accelerate
new-gold-investor creation.
Mainstream investors are not contrarians, they never buy near lows
when things are out of favor and cheap.
Instead they wait for highs, piling in to chase momentum. And new record gold highs contrasted
with their limp portfolios hobbled by pathetic zero-yielding cash will prove
very enticing.
And of course if gold rallies big this autumn, the precious-metals
stocks should rocket up and leverage its gains. Despite recovering strongly since the
stock panic, as a sector PM stocks remain very undervalued today compared to prevailing gold prices. So not only are PM stocks almost certain
to surge strongly with new gold highs, but they have a lot of catching up to
do yet before they even reflect today’s
levels. Thus the prospects for PM
stocks this autumn are simply dazzling.
At Zeal in recent weeks we launched our latest PM-stock campaign to
ride this year’s highly-probable big autumn gold rally. Unlike most PM-stock traders who are
new to this sector, we’ve been actively playing this game very
successfully for a decade now. Between our acclaimed monthly and weekly subscription newsletters, over this decade-long span we’ve
launched and realized 235 gold-stock trades and 104 silver-stock trades.
One of the reasons our monthly Zeal Intelligence newsletter is so popular is our ongoing performance
in our real-world trades. Over
the entire span since mid-2000, we’ve averaged an annualized realized
gain on all our ZI gold-stock
trades of +58.6%. All our ZI silver-stock trades ever
made averaged +44.2%. Of course
these averages include all our losing trades as well, even those during
2008’s brutal stock panic.
These results are tough to beat over a decade and hundreds of trades,
we know our stuff.
So if you want to ride the big autumn gold rally, we can help you do
it. In addition to closely
following gold, commodities, and the general stock markets, we’ve spent
many years deeply researching the
entire universe of publicly-traded gold stocks and silver stocks. We publish comprehensive profiles of
our favorites from time to time in deep fundamental reports. Subscribe today to Zeal Intelligence and start putting our vast and
hard-won precious-metals-stock knowledge and experience to work for you!
The bottom line is gold looks incredibly bullish heading into autumn
2010. Its big seasonal
investment-demand spikes out of Asia are just starting to ramp up. And it is entering its strong season
at relatively-low levels technically in an apathy-filled environment. Any rally at all will push this metal
to new all-time nominal highs, which will really improve psychology and
accelerate capital inflows into gold.
And this big autumn gold rally is happening while investors are scared
of the stock markets and sitting on mountains of cash doing nothing for
them. There couldn’t be a
more opportune time for the media to get fixated on new record gold prices,
driving investor interest. While
the metal’s gains should be excellent, they will be easily dwarfed by
those in the long-out-of-favor precious-metals stocks.
Adam Hamilton, CPA
Zealllc.com
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information.
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