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When discussing gold and commodities on CNBC last month, I
said I expected gold to underperform commodities
such as energy, base metals and agriculture for a period of time. While that
scenario has played out and will likely continue to for a little while
longer, gold bugs should be encouraged by how the precious metal has
performed in recent weeks; while gold was quite overbought on a short-term
basis a month ago, it has very quickly moved to a less overbought state while
giving back only about 10% of its price as we speak. That's bull market
action.
Now, this correction could go on awhile
longer and I don't consider a downside target between
$800-$850 to be out of the question, but we may only end up seeing a
time (sideways) correction in gold much without much more downside in terms
of price.
3-year chart of gold:
As you can see, a case could be made
that gold recently looked as overbought as it did at its last important intermediate
peak in 2006 -- although for a number of reasons I don't
consider its recent peak to have been as extreme as that last one -- but even
if so, it is reasonable to think that most of the price damage that's going
to be done to gold in this correction has already occurred.
At the same time, look at the U.S
dollar:
While gold was starting its correction a
month ago, the U.S. dollar was very well set up for an oversold rally. What
has happened, though? The Greenback has become much less oversold without
going anywhere -- this should strike any dollar bull as worrisome, weak
action. Maybe it will start to get going to the upside from here, but it
better do so in a hurry else a break to new lows is likely to result soon.
Should someone without precious metals
exposure go piling headlong into a holding like GLD today based on this
snapshot? I wouldn't think so, but those looking to average in over time can
start doing so much more comfortably than they could have just a month ago.
*Note: readers can click here to listen to my podcast interview with
Roger Conrad about current energy trust valuations in
general and the PrimeWest takeover, in
particular.
Chip Hanlon
Delta Global Advisors
Phone: 800-485-1220
www.deltaga.com
Chip Hanlon focuses on foreign equities,
currencies and commodities. He is currently the president of Delta Global
Advisors, an SEC-registered investment advisor with
more than $1BB in assets under management. Previously, he was the C.O.O. and
chief U.S. strategist for Euro Pacific Capital, president of Unfunds, Inc. and vice president of investments and
syndicate director for Sutro & Co. He is also a contributing writer to Green Faucet and to Real
Money, the subscription service of thestreet.com.
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