Precious Points: Fool's Gold

By: Oroborean | Mon, May 12, 2008
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"If the rotation trade fizzles and such a rally in gold materializes, while it would tend to discredit an impulse down, it may trap many longs into thinking the larger correction is over, whereas the chart shows we've likely only reached an intermediate term bottom after reaching previous resistance and oversold levels in the RSI. While silver can easily drop into it's 200-day sma near $15.35, it's also reaching oversold levels and should be due for a relief rally soon, in which case resistance at $17 and at the broken trendline will be crucial." ~ Precious Points: All That Glitters, May 03, 2008

Everything last week pointed to a relief rally in precious metals, but it continues to look like a sucker's rally, fool's gold. That said, B waves can extend considerably and even appear impulsive, and with gold seeming to have broken RSI trendline resistance and completing a bullish MACD crossover, short term traders may very well try to continue their luck on the long side this week, though last week's price action, including the erratic movements on Friday, provide no particular insight as to the immediate direction. We seem to have completed the minimum requirements for a 3-wave correction, but as shown in the chart below, may need to see the wave subdivide further as drama in the currency and credit markets plays out.

On the other hand, this gold rally still has yet to take out the 5-week simple moving average on the weekly chart below. With buyers eyeing the critical $800 support level, could this price begin acting as a magnet pulling gold lower? And will determined sellers pile on to push gold lower and seemingly put the final nail in the coffin, so to speak?

Much attention has also focused on the oil/gold ratio of late, the historically low price of gold compared to oil a fact reflecting current perceptions of relative value. Simply put, oil is perceived by today's market as a far more useful and desirable asset in today's global economy than gold, which has momentarily fallen out of favor.

In time, precious metal will be reaffirmed as a superior store of wealth, but failing a real supply threat, such as the rebel attacks in Nigeria that seem to jack up crude every week, or the African power outages that jeopardized platinum production, trading on a return to the historical mean in the gold/oil ratio is ill advised. Though some movement against the recent trend could unfold, it's unlikely gold will even come close to filling the gap to historical norms without a return to crisis that creates an even broader loss of confidence in paper currencies and the governments that issue them. Or, alternatively, petroleum could be replaced as the world's primary source of energy, also something that's probably inevitable but, as a short term catalyst, falls, well, short.

But if making comparisons is too tempting, a better place to look might be within the metals complex itself. Despite having corrected more sharply than gold, silver continues to outperform on the back of industrial demand for physical metal and short term supply bottlenecks that will likely see the white metal continue its outperformance in either second half scenario, crisis or recovery. Better yet, silver continues to react well to immediate support and resistance levels, with last week's action testing the trendline mentioned in the previous update and closing just below $17. Breaking north of this line, which also coincides with the 5-week sma currently, should see silver trading up to $18 and possibly higher in the short term. Failure at $16, however, could slip down to $15 very rapidly.

And finally copper has outperformed both gold and silver year-to-date, taking its cues from global economic strength and infrastructure building while largely avoiding deleterious effects of currency headwinds. A prolonged consolidation above $4.50 will leave copper primed for a breakout to new record highs by year end.

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Oroborean

Author: Oroborean

Joe Nicholson (oroborean)
www.tradingthecharts.com

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual. Check with your licensed financial advisor or broker prior to taking any action.

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