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Gold Prepares to Breakout... or Has It Already?Erik McCurdy Note: The Gold Currency Index (GCI) was created by Prometheus Market Insight in order to track the true, intrinsic value of gold as an international currency itself. This tracking index is a composite of gold prices in the currencies of 10 of the largest economies in the world as defined by GDP. During secular bear markets, precious metals like gold play an important role in a properly aligned investment portfolio. When stocks perform poorly, as they tend to within a secular bear market environment, investor interest in gold as a safe haven increases substantially. Accordingly, secular bear markets in stocks have historically been closely correlated with secular bull markets in gold, and the current secular bear is proving to be no different. The current secular bull market in gold began in 2001 as seen below on the monthly chart:  Given that gold plays such an important role within a secular bear market environment, we wanted to find a more accurate way to track its intrinsic value. The thing about gold that makes it unique as an investment vehicle is that it is truly a currency itself, and when it is analyzed in terms of another currency, such as the US dollar, the price action reflects not only the intrinsic value of gold, but the value of the underlying currency. In order to construct an accurate model of gold as an international currency itself, it is necessary to remove the distortions created by country currency relationships. Only then can the real value of gold be tracked and evaluated using our technical analysis tools. To that end, we created the Gold Currency Index (GCI) several years ago. Below is the current GCI monthly chart:  The GCI has proven to be a very worthwhile experiment since its creation in 2005, mostly due to the accuracy with which its divergent behavior has predicted the future direction of price. As chartists, we are constantly monitoring price action for divergences as they are often the harbingers of important moves, both up and down. Over the past four years, every time the GCI has materially diverged from the price of gold in US dollar terms it has successfully predicted the direction of the next move. Every time! Thus, we have come to value the GCI as a gold market analysis tool, and we expect its impressive track record to continue. Time will tell. As for current divergences, take another look at the monthly charts above. Notice how gold in US dollar terms has struggled to break above the critical, psychological resistance at the $1,000 level since it first tested that area in early 2008. After that initial test, it corrected back to uptrend support in late 2008, before once again moving up to the highs. Granted, the price action since the beginning of 2008 is bullish, and probabilities currently favor a breakout to new highs at some point moving forward, but it is important to note that the $1,000 barrier has yet to be breached. Now, take a look at the GCI over the same period. Instead of merely testing the 2008 high, the GCI actually broke out again in early 2009 and is currently forming a pennant that often signals continuation (or, in this case, another move higher). The fact that the GCI has already broken above its equivalent critical resistance level is an important positive divergence that predicts gold will soon be moving to new all-time highs well above the $1,000 level. Will this positive divergence be as prescient as all of the past ones? We shall see. Stay tuned! Aug 15, 2009 Daily GCI updates are provided at Prometheus Market Insight. 321gold Ltd |
