GOLD REGAINS IS GLITTER / BARRON´S MAGAZINE

Getting Technical

MONDAY, AUGUST 26, 2013

Gold Regains Its Glitter

By MICHAEL KAHN

Both the metal and mining stocks are on the verge of an "official" bull market, but resistance remains at higher prices.
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The rear-view mirror classification of a bull market being a 20% move from a major low is less than useful as it does not tell an investor what to do now. In the case of gold and its 18% move up from its June low, however, it does leave the door open for further gains and an attempt to reach that magic threshold.

To steal a name coined by Ian McAvity, editor of the Deliberations on World Markets report, auric insects, a.k.a. gold bugs, are alive and well.

Last Friday, gold broke out to the upside from a one-week pause in what was already a two-month rally (see Chart 1). It also moved above the trendline drawn from February of this year for a breakout of a different kind. And making it even more exciting for gold bulls it confirmed a third type of breakout seen two weeks ago when the metal moved above chart resistance defined by the April and May lows and the July high.

Chart 1

Gold

To sum up, the market negated its June breakdown and now has its sights set on a much more important feature - the former price floor in the $1542 an ounce area (gold traded just shy of $1400 Monday afternoon). If gold can reclaim that level, it would be a 30% gain and a bull market by definition.

It is difficult to think that a bull market of this magnitude will run into a ceiling, but that is exactly what will happen if and when gold reaches $1542, plus or minus $10. After trading sideways for two full years, and despite multimonth rallies and declines along the way, the market has a huge amount of overhead supply at that level. It will take serious effort for the bulls to overcome this barrier, so it is important to keep the current advance in context.

The SPDR Gold Trust exchange-traded fund (ticker: GLD) is in similar shape with upside potential to its former support floor near 148.50 (it traded at 135.45 on Monday afternoon).

Silver's near-term support and resistance levels are not as well defined, but resistance overhead from its 2011-2012 lows is at 26.25. That is roughly 8% above Monday's trading at 26.25.

Gold and silver mining stocks also are showing signs they are heading higher. The Market Vectors Gold Miners ETF (GDX) already has moved above its October 2012 trendline and 50-day moving average (see Chart 2).

Chart2

Gold Miners ETF

There is one more hurdle to overcome before this group is fully in bull mode, however. The miners' ETF must breach the 31 level to erase a rather strong resistance level on the charts. This is defined by a series of failed rallies following the April debacle, when both the metals and the miners collapsed.

Earlier this month, the miners' ETF once again rallied to this area before failing. But unlike previous attempts, underlying technicals such as momentum and cumulative volume are improving. With relative price stability over the past week, it is easy to conclude that the market is a lot stronger than it was before; a move above 31 would be a good signal for the bulls.

The gains of summer may be dismissed as nothing more than an upside correction in an ongoing, long-term bear market. But for investors who can buy now and don't mind selling in a few months there seems to be a good deal of gains to be made even in this context.

If and when gold and silver reach their respective price ceilings we can revisit the analysis to see if there is more to the resurgence. Until then, auric insects have emerged from hiding to feed on an oversold and much maligned market.

Michael Kahn, a long-time columnist for Barrons.com, blogs about technical analysis at www.quicktakespro.com/blog. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association. Kahn has written three books about technical analysis.