Gold Analysis & Strategy

Gold Spot Price Analysis

1.1. Gold in USD (1 ounce = US$953.90)

• It’s really getting interesting in the gold market. The big question is, “Will gold break through the US$1,000 level and advance to new all-time highs or will it once again fail while trying?” I am still quite skeptical at the moment. I expect another sell off before gold can run to new highs, but let’s have a look at the charts first.

• Three weeks ago gold could not conquer the US$950-957 level. A few unsuccessful attempts at a quick sell-off pushed the price down to US$925. But from here gold showed incredible strength again and within just a few days it went up to US$970. Last Friday, gold dropped after a volatile session to US$954 with essentially no changes compared to the week before. Although it is still summer, the volatility rose strongly last week. It seems something will happen soon.

• The technical picture still looks very positive. Gold is building up more and more pressure to break out of the triangle and through US$1,000. The rising 50d MA (US$943.26) and the 200d MA are moving up parallel. All trend lines are in place and in the last month every pull back was bought immediately.

• Unfortunately the little double top at US$970 (Tuesday & Thursday last week), as well as the big distance to the rising 200d MA (US$887.35), is reminding us to stay alert. Also, the upper Bollinger Band (US$971.55) is the next resistance. Most importantly, the intraday-reversal in the dollar on Friday could be the start of a surprising US dollar rally.

• So far, the correction since the all-time high in March 2008 (US$1,037) is still in play. A sustainable move above of the US$1,000 level is necessary to end the correction.

• Short term, another attempt up to US$970-990 seems possible. But an immediate renewed dollar weakness will be necessary for that. If the August monthly close is above US$960, it is highly likely that we see a breakout to new all-time highs very soon.

• On the other hand, if gold were to fall below US$944, we should witness another sell-off down to at least the US$900-920 level.

• The long term technical and fundamental perspective for gold is still super bullish. The next price targets are the Fibonacci?Extensions of the complete correction since March 2008 at US$1,250 and US $1,600.

• The DowJones/Gold ratio is now at 9.80. The worldwide stock market rally should have reached its final stage this month. At the end of August or at the beginning of September the bears will return. We have witnessed very similar price action during this spring and summer compared to the DAX 8 years ago. In 2001 the DAX recovered within 6 months from 3,539 up to 5,467 points and then dropped down to 2,188 points within the next 12 months!

• Long term, I expect the price of gold to move toward parity to the Dow Jones (=1:1). This means we are in a long term bull market in gold (and also commodities) and in a secular bear market in most of the stock markets. However, this cycle may take years to play out.

1.2. Gold in EUR (one ounce = 672.47€)

• In EUR, gold is moving slowly but surely higher.

• The rising 200d MA (662€) has been tested twice in July and is still an important support. If that support fails, we will see much lower prices. But from a technical perspective this is pretty unlikely at the moment.

• Instead, after getting back above the falling 50d MA (670€), gold should reach the 700€ level soon. Both Bollinger Bands were contracting during July down to a range of less than 18€, which indicates that a breakout is next (which I think will be to the upside).

• As a EUR Investor, the price of gold calculated in EUR is far more important for you than in US$. Don’t fool yourself: from a longer term perspective gold is still a very good buy at or below 675€ an ounce.

1.3 Gold COT Data

• The commercial short position is again at frightening highs! This was not the case in 2005 or 2007 before the big rallies in the gold market started. The commercials now have a larger short position than they did even at the end of February 2009. At that time gold dropped from US$990 to US$863.

• One can argue that the commercials have been short and “wrong” for the last eight years (i.e., since 2001). They always build up their position in rising markets over time and then cover their short positions after a dramatic panic-driven sell-off. They surely earn a lot of money trading like this.

• I still believe that a new rally in the price of gold can start only if the commercials reduce their short positions to below 100,000 contracts. Below US$900 the commercials should cover more of their positions. If we see the next sell-off down to US$845-880 to get rid off the weak hands, the COT data should look very positive again.

18.04.2009 = -153,419 ( PoG Low of the day = US$ 885 )
19.05.2009 = -183,065 ( PoG Low of the day = US$ 920 )
26.05.2009 = -208,136 ( PoG Low of the day = US$ 939 )
02.06.2009 = -226,521 ( PoG Low of the day = US$ 970 )
23.06.2009 = -194,430 ( PoG Low of the day = US$ 913 )
14.07.2009 = -182,287 ( PoG Low of the day = US$ 917 )
21.07.2009 = -204,226 ( PoG Low of the day = US$ 944 )
28.07.2009 = -202,521 ( PoG Low of the day = US$ 934 )
04.08.2009 = -228,193 (PoG Low of the day = US$ 950 )

1.4. Gold Seasonality

• August is a pivotal month for gold because it tends to start a seasonal market trend that lasts 6 to 9 months. Normally starting around August, the price of gold rallies until the spring; therefore, the seasonality perspective supports higher prices in the weeks and months ahead.

1.5. Gold Sentiment

• Most of the time big rallies and new bull markets are born in a panic sentiment after a strong sell-off (e.g. DOW in March). At this moment, most of the market commentators and the “gurus” expect a breakout “very soon.” To me this current sentiment feels way too positive, and I am not planning to move with the crowd.

1.6. Conclusion

• The next few weeks will be very interesting. There is a lot of technical evidence for a final breakout to the upside very soon. But if the long-term bear market in stocks shows up again, gold will be hit as well. I recommend watching the charts very carefully.

A rise above the US$ 990-1000 level confirms the seasonal pattern. If this is the case, we should see the next leg of this gold bull market and prices reaching to about US$1,500 in spring 2010.

A pull back below US$940 indicates another wave of correction down to at least US$900-920 or even US$845-880. This could last until early October before gold might be ready to challenge the 1,000 level again. By then (with a better COT picture), I expect Gold to be successful.

Gold in USD US$954 the technical picture is very positive, pull backs are being bought immediately Bullish
Gold in EUR 672€ slow breakout Bullish
Gold in GBP 572£ sideways Sideways
COT Data -228,193 extreme short position of the Commercials Bearish
Dow Jones/Gold Ratio 9.80 the bear market rally seems to come to an end soon Bearish
Gold/Silver Ratio 65.3 silver is stronger, positive for the precious metals Bullish
Gold/Crude Ratio 13.47 doesn’t have a lot of meaning at the moment Sideways
Gold – ETF stocks No big changes and hardly any influence on the market Sideways
Gold Seasonality August is a pivotal month for precious metals, from now on the seasonality is positive Bullish
Gold Sentiment Sentiment is almost euphoric Bearish
Gold mining stocks HUI Still strong, but no breakout above of the 380 level yet Bullish
Spread Spot/Future US$1, the bullion market is tight (review issue 12/09) Bullish
US Dollar Weekly reversal top last Friday? A surprising Dollar Rally seems possible Bearish
US Dollar COT Commercials net long, a surprising Dollar Rally seems possible Bearish
Bullion market Demand from India seems to stabilize Sideways
Jewelry demand Still very low demand Sideways

2. Gold Mining Stocks Analysis

2.1 Gold bugs Index USD (366.27 Points)

• Gold mining stocks and the HUI have risen in parallel with the DOW, DAX, most of the stock markets and gold during the last couple of weeks.

• So far, the rally ended last Tuesday at 380 points. Since then the HUI has been moving down slowly. A failure of support around 360-365 would be a sell signal.

• Until now, the buy signal created by the MACD in early July is still in play. The upper Bollinger Band (US$383.95) makes higher prices possible in the coming week. The flat 50d MA (351.56) and the rising 200d MA (297.32) are running now about parallel as they do also on the gold chart. Everything looks OK there.

• The HUI did not confirm the last high in the gold market on Thursday, which is a clear warning sign. Most of the time the gold mining stocks usually run ahead of gold itself.

• I have to remind you again that gold mining stocks are moving parallel with the broad stock market. If we see a strong sell-off in the stock market this autumn, the HUI will be beaten down too. That case will present us with a great buying opportunity.

Source: Florian Grummes