Gold: No rush to get long

Gold bled lower the entire month of December and currently has many folks screaming to buy’em again.  What some of them may be forgetting however is that gold has been moving lower since October 2012, and at least from a momentum perspective doesn’t yet feel entirely ready to bounce back up.  As I will describe shortly, I am not calling for a further major deterioration in the price of gold, but rather think that in the near to medium term investors might get an opportunity to buy it somewhat cheaper.

These six straight weekly losses in the price of gold have also caused a divergence between itself and stocks.  Since the 2009 lows in equities, gold and stocks have had a nicely positive correlation most of the time.  This positive correlation comes not very naturally but rather artificially as central banks the world over have caused risk on and risk off periods, where investors have distinguished little between risk assets on average.  In this case, yes, gold is considered a risk asset.

There are two recent periods of note however where this positive correlation has temporarily broken; the August through October 2011 market turmoil period and currently since November 2012.  See the chart below.

As a side note, for purposes of analysis I will be using the SPDR Gold Trust etf (GLD) in the following charts.

From a longer-term perspective on the weekly chart it is difficult to imagine (assuming central banks don’t immediately reverse their dovish course) that gold is about to fall into the abyss.  Furthermore, also from a structural point of view, I see gold recoupling the up-trend with stocks at some point in the first or second quarter of 2013, and thus get back in synch with the positive correlation.

Note also that on the longer-term chart gold has been acting more as consolidating rather than topping, and thus the triangle-shaped price action of 2012 and the last quarter of 2011 may lead to a re-test of the September 2011 highs near 1925, or 185 on the SPDR Gold Trust etf (GLD).

On the closer-up charts however is where I see somewhat more weakness.  Measured from the May 2012 lows up to the October highs, the SPDR Gold Trust etf (GLD) has now retraced almost exactly 61.80%, which in the world of Fibonacci numbers is an important level to watch.  As such I have come to learn however that gold does not trade so well technically since 2009 and I would not be surprised to see an overshoot lower past this level near $158.25.  Supportive of this theory are the momentum oscillators such as Stochastics and the Relative Strength Index, neither of which are in oversold conditions that would merit a better bottom.

Given the above analysis I see the SPDR Gold Trust etf (GLD) sliding to near $156 before better price stabilization may be considered.  Those looking to go long gold may have some time left before needing to jump in.  Patience shall be rewarded.


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