After making new highs and reaching $1,923.70, Gold has been in a downtrend and and it is now about 17% below its Sep 6 high. Make no mistakes the yellow metal is still 15% up for the year outperforming the S&P (-1.6%) and the vast majority of asset classes.
A number of investment managers and media pundits have rushed in and called the end of the gold’s decade long bull run. However, a look at the technicals may actually suggest something entirely different: the primary up-trend is intact and the recent decline is nothing more than a correction. Furthermore, the extent of the price consolidation may be just what it is needed to propel the precious metal to new highs
The chart below shows the daily price for GLD, the uber-popular ETF that holds gold bullion against shares held by investors, from July 2008 to-date.
A number of observations can be made:
- The main up-trend appears to be unbroken; while the retracement brought the price toward the bottom of the channel (the two parallel orange dotted lines), Gold is still within the long-term channel started in Nov 2008 .
- The trend is still above the 200 days Moving Average. Since March 2009, the 200 dys MA has served as an effective support level and until the level is broken the weight of the evidence is still for a continuation of the current trend.
- Last summer was not the first time Gold registered a greater than 15% divergence from its 200 MA; it happened already three times since the beginning of the uptrend in Nov 2008. In all three instances, the peak from the rally was followed by a retracement between 8 and 13% and took an average of 148 sessions to go back to the relative high. While the current consolidation is only in its 41st session, the correction may have reached its trough already Sep 28th when GLD reached $156.22, a 15% correction since its Aug 22 high.
- Lastly, the On-balance-Volume indicator (the pink line in the volume section of the chart) has declined rater than collapse, and appears to have stabilised indicating a material amount of buying pressure supporting prices.
While Technical Analysis is often more useful as context than catalyst, a quick review of key fundamental and psychological factors also point to the likely continuation of Gold’s bull run.
- On the fundamental side, the key rationale behind gold investment still apply: uncertainty regarding the future purchasing power of “fiat” currencies, concern about accelerating inflation (especially in emerging economies) not to mention the continuing lack of confidence in more traditional investment options.
- As Gold has been the star performer since the 2008-2009 crisis with a return in excess of almost 120% in the last three years, the bullishness around the precious metal reached a level than any contrarian investor will see as an impediment to further appreciation. The consolidation of the last two months on the other side, provides for some needed bearishness that can in turn fuel the next leg of the rally and, possibly, propel Gold beyond the important psychological $2,000/oz barrier.
In conclusion; technical analysis seem to support the notion that the recent decline in Gold prices should not be seen as the end to the long-term bull phase. On the contrary, the same type of retracement has been part and parcel of the price action since Nov 2008. Furthermore, from an investment psychology standpoint, the correction may indeed set up the stage for new higher prices in the next few months.
Disclosure: I am long on GLD.