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The fundamental reasons
gold is rising are numerous and have been discussed over and over on this site
and elsewhere: ultimate store of value, jewelry demand from the Far East, awareness from a new audience due to the gold
ETF, the end of the world, etc.
Personally, I subscribe to the theory that gold is still being treated
by investors like any other commodity, which are broadly floating higher on a
sea of global liquidity and increasing wealth (while central banks around the
world may serve to undermine it, the world does continue to grow richer).
Despite its recent push to
20-plus year highs and fundamental arguments aside, technically speaking
there remains reason to believe this move in gold continues to hold
longer-term implications. On a
point and figure basis, the recent relative strength readings for gold have
continued to indicate many more calendar months of strength. Historically,
such signals last 2 years or more and gold has recently re-confirmed such
strength.
In fact, when you look at
the 1990’s and compare the performance of the S & P 500 (up 288%)
to Gold (down nearly 20%), it’s no surprise to learn that the relative
strength of London Gold was on a sell signal from December 1990 to July of
2001! It shouldn’t be
unreasonable, then, to suspect gold’s current relative strength
out-performance to last longer than usual; while gold’s relative
strength readings over the last 3 years have actually vacillated between buy
and sell signals, London Gold’s most recent action compared to the S
& P 500 was a buy signal on October 11, which could be the one that
lasts.
Further, gold of course
turned in a powerful upside move last week along with many of its base metal
cousins. Though it may surprise
some, it looks like the consolidation of gold’s initial break above
$500 may already be over; in fact, on a technical basis it looks like little
more than a normal pause in an orderly up-trend. Indeed, last Friday’s move
through $538 foreshadows a potential move to the $600 - $610 range.
One word of caution here: in
the short term, gold remains very overbought, even more so after the latest
breakout. In fact, London Gold
itself is almost 100% overbought when compared to its own price action
history while many gold and precious metals mutual funds are 200% overbought
on the same basis.
Despite its continued
strength on a technical basis, there could possibly be a couple of
uncomfortable near-term scenarios for gold’s next act. First, it has to be acknowledged that
should it reverse course, it might be early in the process of putting in a
double top, possibly one of great significance. Second, it could essentially stand
still for a bit to consolidate its recent gains, albeit in a choppy range
that could spur holders to reach for the Dramamine as a result.
However, it simply would
not surprise me if it kept rising as I do suspect that gold investors are
emboldened now and will push it to an even more overbought condition with
this latest break. Conservative
investors, of course, will likely want to have the price come back to them
before committing and should wait for some sort of pullback before taking
action on the long side. Based on
the strong relative strength, however, it seems it would be wise to use any
weakness to accumulate the metal, particularly with downdrafts to the $500
level.
By : Bruce Zaro
Chief Technical
Strategist
Delta Global Advisors,
Inc.
800-485-1220
bzaro@deltaga.com
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Bruce Zaro
Chief
Technical Strategist
Delta Global Advisors, Inc
877-746-4228
bzaro@deltaga.com.
Over his 20-year investment career, Mr. Zaro has become a
highly-regarded technical analyst who runs private client portfolios at Delta
Global. For the last year, he
served as Managing Director of Granite Wealth Management outside of Boston and spent nearly
15 years prior as a Vice President at Gage Wiley & Co. His current firm is full-service, but
specializes in providing international market access as well as alternative
investment strategies
19051 Goldenwest, #106-116 Huntington Beach, CA
92648 Phone:
800-485-1220
Fax: 800-485-1225 www.deltaga.com
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