Gold at a Monthly Crossroads: Which Way Now?

Gold traders and investors have been waiting for a clean break above Gold’s nominal all-time high, recorded back in March 2008, but the process has been anything but sure and swift.

Having risen approximately 300% since the start of its bull run in 2001, Gold has far outpaced the investment gains in virtually every other investment class, including stocks, bonds, real estate and cash. Gold bugs feel certain that this time will be the ‘big one,’ and that the precious metal will likely hit $2,000 - $3,000 an ounce, if not higher. Commodity experts like Jim Rogers also believe that Gold will continue to surge higher, right along with most energy, food and base metal commodities; in fact, some believe that the bull run in commodities still has another 5 –10 years to run higher, given the tremendous demand from developing economies for massive amounts of raw materials. And certainly, the tremendous amounts of deficit spending being seen in nations across the globe have also caused many investors to flee to the perceived safety of Gold as a first-class inflation hedge. So, there are plenty of fundamental reasons for Gold to continue to march higher over the next few years, no argument there. But what about the technicals on the charts- what are they telling us right now? Are there sound technical reasons why traders and investors should prepare to buy more gold on a confirmed breakout above the March 2008 high – or not? Let’s have a look at the long-term chart of cash Gold and see what the monthly price bars are telegraphing to us.

Monthly Chart of Gold

Chart by: MetaStock

There is no doubt about the long-term nature of this uptrend in Gold – it’s very much intact, with a current price far above both its 20 and 50-month exponential moving averages (which are also maintaining a healthy degree of spread between themselves, even as they continue to slope upward), an Aroon (14) trend intensity indicator that has recently swung to the extreme bullish end of its range, and a Metastock CS Scientific expert advisor (see gray ribbon at bottom of chart) that is also confirming the presence of a strongly trending move. There is, however, one glaringly negative technical clue on this chart, and that is the current state of the RSI (14) indicator, one that is exhibiting an unusually bearish amount of negative price-momentum divergence. Even though Gold actually set a new cash high before pulling back intra-month (in September 2009), the RSI (14) failed to confirm the new high, and this should be something that every Gold trader and investor needs to be aware of. Even with that little ‘bugaboo,’ this chart has an undeniably bullish posture, attitude, presence; whatever you care to label it with; by all account this looks like a commodity ready to make a substantial break to higher levels – if not now, then in the coming months.

There are a couple of other factors we need to consider here, as they factor directly into the decision-making processes of those considering long entries in Gold now; the first of these is what is known as the ‘seasonal’ pattern in Gold. Gold has a well-documented track record of achieving its highest annual prices in the latter months of each calendar year, and this year may be no exception. There is a little issue here, as well; Gold is usually weak in October, tending to back off from the gains made in previous months. Sometimes it just moves sideways during early November before surging strongly throughout the second half of November and all the way on through December. If this seasonal factor is ‘in the groove,’ so to speak, this year, then we may very well see a bit of a pullback in Gold for the next 4-5 weeks.

The other fundamental factor has to do with the current investment posture of the so-called ‘Large Traders’ (aka: hedge funds), the ‘Commercial’ traders and the ‘Speculative’ traders, ranked according to their respective commitments to the long side of the Gold futures market. The latest COT figures indicate that the Large Traders are almost completely committed to the long side of this market, even as the deep-pocketed Commercial interests are only marginally long. The small-fry traders of the futures industry - the ‘Small Traders’ are also substantially committed to the long side. To better understand these commitment biases, you must first understand that the Commercial interests generally do the bulk of their buying only after Gold sells off. They buy more and more as it falls, in effect ‘scaling in’ to their positions over time. The Large Traders generally use trend-following methods to initiate trades, so they normally buy on signs of increasing upward momentum. Guess who is selling them their Gold? You got it – the Commercial interests feed it to them all the way up. Small Traders are all over the place at times, but usually seem to ride on the coattails of the Large Traders. The current COT structure does seem to imply a short-term Gold sell-off is due, based on the overly lopsided commitments among the various market participants listed above.

Putting all of this technical and fundamental information together, here are some general conclusions we can arrive at concerning Gold:

1.)  Gold is very likely to sell off in October, due to the pronounced negative price-momentum divergence on the monthly chart and because of the lopsided, overly bullish bias of Hedge funds on the long side of the Gold futures market. Working together with these factors is the overwhelming (for more than 30 years) tendency of Gold to weaken during the month of October.

2.)  Gold, after a period of weakness in October, has a very good probability of rising strongly through the remainder of 2009, possibly even making a clean monthly close above the March 2008 cash Gold price of $1,011.25. The year 2010 may also see further gains in the yellow metal, as the quarterly price cycles (not shown) have just completed a bullish crossover, confirming the likelihood of substantial gains yet to be made for Gold in the years ahead.

Summing up, the balance of 2009 should be a very exciting and memorable period for Gold traders and investors. With the charts and other fundamental factors providing us with insight, we have the tools we need to be ready for whatever this unique commodity market may send our way. Join my Free Trading Group at www.ETFTradingPartner.com

Mark Brown