 Tactical Gold
Trends 2
Adam Hamilton
Archives
September 17, 2004
Last week we took a look at the current tactical, or short-term,
trends affecting silver.
The white metal is certainly languishing near its major support
lines these days, but thankfully both its bull market and its
current tactical uptrend remain very much intact.
This week I would like to return
our analytical focus to gold. While our subscription newsletters
continue to monitor and evaluate the tactical gold trends as
they unfold, it has been a couple months now since the original
Tactical Gold
Trends essay was published. With the exciting autumn trading
season dawning, an update is in order.
Gold really is the ultimate
precious metal and its behavior is certainly the single most
important driver of investment performance in everything
precious-metals related. As long as gold's secular
bull market remains intact and healthy, investors and speculators
can overlook technical weakness in other arenas like silver or
precious-metals equities. Gold truly is the PM key.
As in my original tactical
gold trends essay, there are three charts that we need to consider
when discussing gold trends. First, obviously, the gold chart
itself is absolutely crucial. No surprise here! Second, since
gold still trades like it's in a Stage
One currency bull, it is important to consider the behavior
of gold's arch nemesis in the fiat-paper world, the mighty US
dollar. Finally, since leveraged gold stocks continue to be the
most popular gold investments and speculations, we will examine
the HUI gold-stock index trends.
Charts are so important to
prudent investing and speculation because they place recent price
movements within their proper context. Whether gold rises or
falls tomorrow, this move in isolation is probably meaningless.
But when series of price moves are considered in trends, clear
patterns emerge that help us view the markets objectively and
short-circuit our emotions that are so hyper-sensitive to the
immediate. Perspective is everything.
And the technical perspective
on gold remains outstanding. There is no more important tactical
chart for PM investors and speculators to monitor than that of
the current gold scene.
Even after gold's necessary,
healthy, and expected
bull-market correction earlier this year, gold's key 200-day
moving average continues to march northwards. Rising 200dmas
are one of the most foundational bull-market technical signatures
for two reasons. First, 200dmas tend to run parallel with
the primary strategic trend, which in gold's case is indisputably
higher.
Second, 200dmas usually form
the strongest bull-market support zones from which corrections
tend to end and bounce higher. The early 2004 gold correction
ended up slicing through its 200dma support initially, but gold
has since made a strong comeback. The metal is now clawing relentlessly
higher and soon its 200dma will be under it and acting as major
support once again.
And, while not evident in this
tactical chart, back in May gold really didnít break materially
below its 200dma when considered in the context of its entire
secular bull. It merely traded down to its bull-to-date linear
support line before bouncing higher and recovering in early May.
Last year gold also traded slightly below its 200dma in its early
2003 correction
before a powerful upleg, so temporary sub-200dma readings are
nothing to fear.
The red line tied to the left
axis of this graph, Relative Gold (rGold), normalizes this important
relationship between gold and its 200dma so it is easier to compare
over time. Calculated by dividing gold by its 200dma, it shows
gold as a constant multiple of its major 200dma support. When
gold bottomed in May, rGold traded down to 0.953, or 95.3% of
gold's 200dma. The preceding April 2003 major interim bottom
was similar when rGold bounced at 0.978, again slightly under
gold's 200dma.
As the red support line drawn
above shows, rGold is now climbing in a definite uptrend. It
is spending more and more time above the crucial 1.00 level,
where the gold price equals its 200dma. Whenever an asset's price
is consistently gaining ground relative to its 200dma it is a
very bullish sign and provides strong evidence that its bull
market remains strong.
From a tactical perspective,
gold's new uptrend, which I believe will ultimately blossom into
a full-blown upleg, looks absolutely fantastic since its correction
ended in May. The rising blue support and resistance lines on
the right side of this graph frame this current tactical gold
trend perfectly. There are all kinds of interesting developments
in the gold price in the past four months that ought to excite
gold investors and speculators. Things are looking good!
We will start our tactical
gold analysis from the bottom, its current support line. Note
above that gold has made three consecutive higher interim lows
since May. These bounces in June, July, and earlier this month
are numbered above. Collectively a best-fit line drawn through
these three higher lows and the May correction forms a rock-solid
tactical support zone. This current support is slightly shallower
than gold initially
indicated in June and July, but it is nevertheless quite
bullish.
It is also exciting to note
that this support line is due to intersect gold's 200dma in the
coming weeks. Thus, if gold remains in its current uptrend, it
should be trading back above its 200dma for good, at least until
the next major correction after dazzling new bull-to-date highs
are achieved. Gold's investment appeal will definitely rise for
technically-oriented players worldwide once it leaves its 200dma
in the dust to clearly signal its re-emergence in strong bull-market
mode. I canít wait.
And it is not only the bottom
half of gold's new tactical uptrend channel that is technically
gorgeous. Its top resistance line is also very well defined and
continuously ramping higher than gold's 200dma. There have already
been three consecutive higher interim highs since May, numbered
above, in June, July, and August. A best-fit line drawn through
these highs runs parallel with the lower support line and forms
a textbook-perfect uptrend channel.
Technical analysis is simple,
but elegant. It allows the prices, considered in context, to
do the talking rather than our own volatile emotions. The message
of this tactical gold chart is very positive and bodes well for
gold in the months ahead as this upleg starts to accelerate.
Since its correction ended
in May, gold has carved a flawless series of higher interim lows
and higher interim highs. These new higher lows and highs form
a crystal-clear uptrend channel, which is rock solid with several
intercepts each on gold's lower support and upper resistance.
We couldnít ask for a more persuasive and bullish tactical
technical chart.
This is great news friends!
If you are like me, perhaps this past summer just felt slow and
lethargic to you in gold terms. It certainly did for me
at times. Gold hasnít yet rechallenged its January and
April bull-to-date highs, it hasnít seemed to have a lot
of staying power above $400, and we certainly havenít
seen any real fireworks since 2003.
But as this chart reveals,
all is well in spite of the perceptions of slow times for gold.
Our capricious emotions, driven almost solely by random day-to-day
market noise, led many PM players to conclude that gold was struggling
over the summer. But this dazzling technical picture shows anything
but struggle. Rather we have a very methodical, determined, and
potentially powerful new gold upleg systematically materializing.
Of course gold uplegs donít
develop in a currency vacuum, at least not in Stage
One. Until gold breaks into Stage Two, its near-term fortunes
are heavily dependent on dollar weakness. This current US Dollar
Index tactical chart provides a fascinating study in contrasts.
While gold's chart is technically as unambiguous as a chart can
be, the dollar's latest trend has grown muddled and unclear.
As technical confusion often portends, the dollar may be on the
verge of a serious move.
Not coincidentally, the US
Dollar Index reached its latest interim highs in early May on
the very day that gold was hitting its own interim lows.
Gold and the dollar are ultimately competing currencies, six-millennia-old
real money with timeless intrinsic value versus three-decade-old
100% fiat money ultimately worth nothing more than the paper
on which it is printed. There is no doubt that gold will
win this titanic battle in the end, as no fully-paper currency
backed by nothing but faith has ever lasted long in the grand
scheme of things.
Nevertheless, over the short-term
there are some epic battles waged between sound money and Washington's
hollow IOUs. Right now one of them seems to be raging just below
the surface, not readily apparent to the world as a whole yet
but quite evident to those willing to pay attention. I think
this struggle is contributing to the dollar's extreme technical
indecisiveness of the past couple months.
Following its May interim top
after a normal and expected bear-market
rally, the dollar's downtrend resumed in what will probably
ultimately prove to be the fifth major downleg of its secular
bear market. In June and the first half of July the dollar
fell right on schedule, probing new lower interim lows marked
by the blue numbers above. These established a solid downtrend
support line.
In late July the dollar surged,
rocketing from the bottom to the top of its downtrend channel.
As I discussed last
week in regards to silver though, full swings through tactical
trend channels are not at all uncommon and nothing to get excited
about. While the dollar tried to surge above its 200dma primary
bear-market resistance, it couldnít hold these lofty levels
for long and soon failed lower. This failure helped define the
parallel top resistance line that enclosed the dollar's new tactical
downtrend. So far so good.
Then the dollar bounced again
in mid-August, but this time starting well above its tactical
support at the light-blue point 1 drawn above. This bounce was
nothing exciting technically either, as prices tend to oscillate
more or less randomly all over the place within their tactical
trend channels. The dollar frenetically surged higher again and
broke tentatively above its resistance line in late August, although
the breakout was not decisive or material. Since then the dollar
has continued its technical flirting with breaking out of its
downtrend, albeit without much success.
Now typically there would be
no reason even to discuss this non-breakout, but Wall Street
technical analysts have been making a big deal out of the dollar's
ìnew uptrendî and frightening some PM players. This
supposed uptrend is marked in light blue above, a new multi-month
support line with two higher lows. Obviously this new-dollar-uptrend
thesis is of great interest to the gold community since gold
is so dependent on dollar weakness during the early years of
its bull market. If the dollar rallies strongly, gold will probably
take a serious hit.
While we could indeed be witnessing
the advent of a new dollar uptrend, as the markets are just a
study in probabilities and anything can happen, for a
variety of reasons I remain skeptical and continue to read this
dollar technical ambiguity as bearish. Iíll start with
the least important and conclude with the most important dollar
bearish arguments.
Check out the latest dollar
highs above, which are numbered. The US Dollar Index hit 92.01
in May before rolling over and heading south. In June it rallied
up to its 200dma and closed briefly at 90.01. In July it rallied
again, streaked up through its entire downtrend channel, but
only managed to close at 89.95. Then, in August, its attempt
to break out of its downtrend ended unceremoniously at a closing
level of 89.84. So what does the series 92.01, 90.01, 89.95,
and 89.84 reveal? Lower highs!
While this is subtle, any
series of lower highs is certainly not a bullish omen.
This bearishness is reinforced by the dollar's major moving averages.
The dollar's shorter 50dma has been decaying lower all summer,
betraying a tactical downtrend once the random market noise is
distilled away by the moving average. Even more importantly,
the dollar's key 200dma, its primary bear-market resistance,
remains in its long descent. This has bear market written all
over it.
If the dollar was to rally
significantly higher from here, near both its tactical and long-term
resistance, then it would put the dollar's secular bear in jeopardy.
Yet, relative to historical precedent, our current dollar bear
remains relatively young and unlikely to end so soon. Since the
early 1970s when our current totally-unbacked fiat dollar was
born, major secular dollar trends have tended to run for 5 to
7 years or so before giving up their ghosts. Our current dollar
bear, however, is barely 3 years old now so it is highly unlikely
that it has already fully run its course.
And dollar fundamentals are
certainly not improving, with the States running record deficits,
staggering levels of debt completely unprecedented in world history,
and trivially low interest rates designed to ruthlessly punish
international dollar investors. The dollar bear lives!
I believe that these three
factors, the dollar's lower highs, its descending 200dma, and
its relative youngness as far as dollar bears typically go far
more than outweigh any dollar bullish arguments based on the
short light-blue trend line above. The dollar has been
challenging its upper resistance zone, but so far it has failed
to break out decisively after multiple attempts. And if the dollar
canít break out in the light summer season when trading
in the northern hemisphere evaporates, then I doubt it can do
it in the winter either when global currency traders are paying
attention and ready to short the primary dollar bear.
Instead, the dollar's recent
apparent strength in terms of support has crunched it into one
tight wedge. The light-blue support line and the blue downtrend
resistance line are compressing the dollar price. This zone of
compression, or indecision, will probably break out sharply one
way or the other in the next month or two. My guess is the highest
probability outcome is a break lower, potentially down to the
dollar's lower support now running around 85ish. Naturally such
an event would unleash gold to soar.
In this scenario where gold
catapults higher as the dollar cascades through its downtrend
channel, unsurprisingly the primary beneficiaries would be the
elite unhedged gold stocks. Our final chart of interest this
week examines the HUI unhedged gold-stock index. Like gold, gold
stocks have remained bullish even through what felt like a slow
summer psychologically.
This HUI chart is pretty interesting,
especially since the expected
and healthy correction ended in early May. The HUI's current
tactical uptrend is not as precise as gold's nor as messy as
the dollar's, but kind of in between. Nevertheless, we are
witnessing a series of higher lows and higher highs in the HUI
just as we ought to when gold is strengthening.
At the moment the HUI is in
a fascinating place technically, tightly meandering at the convergence
of several major zones. First, the HUI is challenging its latest
tactical resistance line, the ascending blue line on the right.
Second, it is also challenging its old downtrend resistance line
that arose from its correction in early 2004. Finally and most
importantly, it is also challenging its key 200dma, which has
been its major support for most of its bull to date.
Once this consolidation period
is over and the HUI breaks out of this triple-technical zone
in which it is mired at the moment, I suspect it will head higher.
And it wonít have to rally much to claw back above its
200dma once again. Once the HUI trades decisively back above
its major 200dma support, it will put a lot of nervous PM investors
at ease and the capital chasing gold stocks ought to grow significantly
and bid up their prices.
While this HUI chart is generally
bullish and there is an uptrend, there are a couple bearish
developments of note. It is interesting that the dollar strength
and gold weakness in July was scary enough to PM-stock investors
and speculators to cause them to sell the HUI down below its
earlier interim low in June. July's lower low is certainly not
a bullish sign when considered in isolation, but the HUI has
recovered nicely from it and has already surged back up to the
top of its trend channel. Hence the late July weakness is nothing
to fear.
A bit more disturbing however
is the HUI's 200dma. 200dmas tend to run parallel with the long-term
trend in a market, and the HUI's has been nosing lower
all summer. While this could be construed as an early technical
warning that the HUI is on the verge lapsing into bear-market
mode, I suspect it is just a peculiar technical anomaly. I have
been pondering this odd development all summer and finally think
I understand the reason why it happened.
The massive 2003 gold-stock
upleg, which witnessed a stellar 125% gain in the HUI in only
8 months or so last year, had a curious non-gold component that
contributed to it Ö copper! The third
largest HUI component is a copper miner for some silly
reason, and copper prices soared in their biggest rally in at
least a decade last year. Naturally this copper stock rocketed
higher skewing the HUI upward. If this copper miner hadnít
been included in the HUI, its 2003 rally would not have been
skewed as high and its 200dma wouldnít have been dragged
high enough to roll over this summer.
The current September issue
of our acclaimed Zeal
Intelligence monthly newsletter discusses this copper skewing
of the HUI's 200dma in more depth, as well as digs deeper into
the tactical gold trends. In addition, all of our actual PM-stock
and options trades carefully researched and chosen to ride the
probable accelerating gold upleg are detailed inside. Please
consider subscribing
today to learn how to apply all of this research to earning
real-world profits in your own portfolio!
The bottom line, as always,
is gold. Gold's tactical uptrend looks gorgeous regardless of
the dollar's ambiguity or the technical blemishes on the HUI.
If gold is due to head higher, gold stocks will absolutely
follow sooner or later. The higher gold goes the higher
the earnings of the unhedged miners multiply. As their earnings
rise their valuations fall and pretty soon even conventional
investors will break down the doors to rush into the gold miners.
Gold is the key!
And with the US dollar poised
right on the verge of probably breaking lower and plummeting
through its downtrend channel after failing three consecutive
times to reach new higher highs, gold may indeed be preparing
to soar to fresh new bull-to-date highs itself. Contrarians need
to be ready and positioned to leverage this exciting potential
event.
September 17, 2004
Adam Hamilton, CPA
email:
zelotes@zealllc.com
Archives
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