Gold Analysis and Strategy

Gold Spotprice Analysis

Gold in USD (one ounce = US$1,205.20)

·         During the last two weeks Gold did some pretty sharp movements in both directions. After breaking the uptrendline the price of gold went down to US$1,155.90 very fast. From here a remarkable rally started that brought prices back above the important level of US$ 1,200.00 at the end of last week.

·         Now the important question is: Have we seen the lows for this summer correction already or will there be another leg down (e.g. ABC correction) before Gold will start moving up to new highs?

·         The next strong resistance to the upside is now between the 50-dMA (US$1,211.51), the Bollinger Band (US$1,216.75), the 61,8% Fibonacci Retracement from US$1,266.50 to US$1,155.60 (US$1,224.10) as well as the december high at US$1,227.80. Therefore the current rally should stop between US$1,2115.00 - US$1,225.00 and Gold might at least take a breather.

·         Downside support is still the uptrendline, now around US$1,190.00. Another break of this trendline would be extremely negative and should lead to another sell off and a test of the 200-dMA (US$1,150.21).

·         All in all a kind of tricky picture. The daily chart looks really good after this dynamic recovery while the weekly chart still remains bearish.

·         As well Volume has been pretty low during this last move from US$1,156.00 to US$1,210.00. You can see this in the chart of GLD Streettracks ETF.

·         The medium- and especially the long term picture is still very bullish. My next price target is the Fibonacci - Extension (261,8% of the last big correction) at US$1.600. This might be possible until end of this year or spring 2011.

·         The DowJones/Gold Ratio remains nearly unchanged at 8.84 points.

·         Long term I expect the price of gold moving towards parity to the Dow Jones (=1:1). The next primary cyclical change is still years away. This means we are still in a long term bull market in gold (and also commodities) and in a secular bear market in stocks.

Gold in EUR (one ounce = 907€)

·         If you've followed the advise in my last issue you should have already purchased Gold under 890€. I doubt that this was the only opportunity to buy under 900€ but it is simply important to consequently buy weakness.

·         Short term Gold in € is oversold and we could see a recovery to around 940€.

·         Still missing is the test of the 200-dMA (852€).

·         As well the weekly chart on the right side gives the impression that the breakout level around 800€ needs to be tested for support before a new sustainable rally can start.

Goldbugs Index USD (459.94 points)

·         The Gold Bugs Mining Index HUI is about 8 points higher since my last analysis. First the index rushed down to 430 points. From there a strong rally started that took the unhedged Goldminers back above the important 200-dMA (440.28). Again the 200-dMA proved to be strong and solid support.

·         Now the index is fighting with resistance at the 50-dMA (458,22) and the Bollinger Band (466,73).

·         As a long term investment selected gold mining stocks certainly do have a huge potential. On top they might offer some advantages in case of a gold prohibition. But personally I am not a big fan of the mining shares. During all these years that I am following this sector now the volatility has always been extremely high. Long term investments in gold shares are a roller coaster ride. High Dividends that make a long term investment more comfortable are nowhere to find in this sector. On top you have to do a lot of research since you need to be diversified into at least a couple of stocks. Besides technical analysis you need to be a professional in balance sheets & accounting as well as in geology if you want to catch the big home run. As well you might be confronted with political risk that can hardly be estimated as long as you haven´t been at the mine and in the country yourself. Most of the mining shares are traded in US and Canada, but you´ll need Level 2 real time data feeds to trade & invest professionally. On top mining is not very friendly to nature and therefore definitely not a sustainable investment.

Analysing the charts of the big mining shares helps me to understand better what is going on with gold itself but my money goes into long term physical holdings and short term options and warrants on gold. I do not like Gold mining funds either. You are taking 100% risk while paying the fund manager a nice income cash flow.

Gold COT Data

• Although prices moved down to US$1,155.90 the Commercials increased their short position for around 12.000 contracts.

The numbers are from last tuesday and therefore do not contain the last move up to US$1.210.00.

04/18/2009 = -153,419 (PoG Low of the day = US$885)
12/01/2009 = -308,231 (PoG Low of the day = US$1,190)
05/11/2010 = -282,644 (PoG Low of the day = US$1,201)
06/15/2010 = -278,944 (PoG Low of the day = US$1,220)
06/22/2010 = -288,916 (PoG Low of the day = US$1,232)
06/29/2010 = -289,956 (PoG Low of the day = US$1,231)
07/06/2010 = -249,142 (PoG Low of the day = US$1,191)
07/13/2010 = -248,348 (PoG Low of the day = US$1,197)
07/20/2010 = -215,664 (PoG Low of the day = US$1,175)
07/27/2010 = -227.555 (PoG Low of the day = US$1,156)
08/03/2010 = -222.029 (PoG Low of the day = US$1,180)

Gold Seasonality

·         For now volume is still low and until end of august seasonality does not favor much higher gold prices.

·         But the weak seasonal period is coming to an end soon. September is one of the best month of the year for the precious metals sector.

Gold Sentiment

The weak hands should be out due to the last set back under US$1,160.00.
This is confirmed by the Put/Call Open Interest Ratio for Gold Futures.

Conclusion

·         In the long term term Gold should be on the way to my next price target around US$1,600. Due to the correction most of the weak hands should be out by now.

·         The current rally could continue to move a little bit higher to a maximum of US$1,218.00 - US$1,225.00. From here we should see another decline. But whether prices will move down under the up trendline around US$1,190.00 is really hard to say at the moment.

·         As long as Gold is not clearly closing above US$1,220.00 we should expect a second wave down which could bring prices back to US$1,160.00 - US$1,145.00.

·         A strong move above US$1,220.00 instead would finish the correction and signal the start of the next rally to new all time highs. This scenario is getting more probable the longer Gold can hold above US$1,220.00.