Getting Technical
Gold Is Hot: The Real Deal or Fool’s Rally?
Gold moved above chart resistance but there are several factors that should give investors pause.
By Michael Kahn
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Gold has been on a tear since early July, rising from roughly $1,200 per troy ounce to and through chart resistance at $1,300. Gold bugs got quite excited with the apparent technical breakout, but the rally is not what it seems (see Chart 1).
Chart 1
Last month, I offered the same sentiment, and unfortunately for me it was near the lows. One of my chief reasons was that the yellow metal’s gains were fueled by the weakness in the U.S. dollar and not by any intrinsic demand for metals. Most of the time, gold and the dollar move in opposite directions because gold is priced in dollars. The weaker the greenback, the stronger the metal with all else being held constant.
At that time, gold priced in euros was in a down trend and moved below support. Even now, it remains below its 200-day average making any strength seem suspect. And clearly, this chart is absent of any upside breakout at all (see Chart 2).
Chart 2
Following Wednesday’s ADP report that showed better-than-expected job growth for August, the dollar now may have already negated that breakdown (see Chart 3). This possible reversal of the decline gives cover for the Federal Reserve to raise interest rates again.
Chart 3
But there is more. Gold bugs also cite tensions with North Korea as reason to shift money into safe-haven assets such as gold and U.S. Treasuries. When that country fired a missile over Japan overnight Monday (Eastern Daylight Time), it caused the dollar to drop and gold to soar.
However, by the end of trading Tuesday, both markets reversed course. The SPDR Gold Shares exchange-traded fund (ticker: GLD) actually closed with a loss.
These markets shrugged off the threat, and for gold it suggests a lack of true underlying bullishness. For the dollar, it suggests that there is more bullishness than meets the eye. And while it is still early to declare that the dollar is going to rally significantly, the chart shows conditions in place for a technical reversal.
Let’s get back to simple chart reading on gold and see that while 1300 level is important, it is not the only hurdle in this market (see Chart 4). There is another good resistance at about 1310 defined by the lows of last summer and also the high-water mark just ahead of the election.
That is where the market traded during most of Wednesday’s session and remains a reason why bulls should be wary.
In contrast, speculators, who are usually caught on the wrong side of market turns, are net long, expecting higher gold prices ahead. The combination seems deadly for further gold gains.
The caveat is that the most recent data were compiled last week ahead of North Korea’s actions, but also ahead of this week’s ADP report.
It is hard for me to completely dismiss the positive short-term move in gold, especially as metals tend to be seasonally firm this time of year, but there are too many other factors working against gold. The key will be whether the dollar can maintain its new-found strength. If it gives up recent gains then I will have to admit defeat on gold and look for $1,400 as the next stop.
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