Gold Still in the Red from a Short-term Perspective

By: Przemyslaw Radomski, CFA | Tue, Feb 14, 2012
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Based on the February 10th, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

There is a study published by the Credit Suisse and the London Business School that says that gold prices have been too volatile to play a reliable role as a hedge against inflation over the past 112 years.

While inflation does not reduce gold's real value, it has no yield or income flow and the precious metal has given a far lower long-term return than equities in the period since 1900, or 120 years, says the study. Generally, the analysis is conducted based on periods when gold was money and where it was not and we believe that these two should not be mixed.

We realize that gold does not give income or interest. People invest in gold is a search for yield through capital appreciation or as a safe haven - or as money. When interest rates are close to zero or negative in real terms, gold begins to glimmer. The US, Europe, the UK, China, India, gold's biggest markets, all have negative real interest rates. It is true that the past 112 years have not all been good for the yellow metal. Yes, there are bull markets and there are bear markets and we are in the midst of a bull market in gold right now.

In the period since 1900, gold gave a real return of 1.1 percent in sterling terms and its value fluctuated widely, said the study. "Gold is the only asset that does not have its real value reduced by inflation. It has a potential role in the portfolio of a risk-averse investor concerned about inflation," it said. "However, this asset does not provide an income flow and has generated low real returns over the long term. Gold can fail to provide a positive real return over extended periods."

True. That's why we are invested now, while gold is in the midst of a bull market. When it swings into a bear market we'll consider other options or perhaps evaluate the profitability and risk of trading the downswing - impossible to tell at that point. However, the key issue is that one does not have to be fully invested in the precious metals sector during bear markets - what is the assumption of the study.

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said that given the fragile global economy and geopolitical risks, investors should be underweight in equities while favoring "selected commodities" such as gold and oil.

Obama seems to have run into a good streak of luck in his bid to get reelected president. Just in the nick of time, the U.S. economy is improving, at least as evidenced by last Friday's jobs report. Payrolls numbers are up by 243,000 jobs. Unemployment is down to 8.3 percent.

The Sunshine Profits Team extends our best Valentine's Day wishes. To see if you'll fall in love with the precious metals sector again, let's begin the technical part with the analysis of the yellow metal. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)

$GOLD:UDN (Gold (EOD)/PS DB US$ Bearish) CME/NYSE

We begin with the chart of gold from a non-USD perspective. Last week there was a weak consolidation from a non-USD perspective and the strong similarities to the trading patterns of mid-2011 are no longer in place. With these developments, it is unlikely that a move to the upside will be as sharp this time. We have seen two consolidations this time and last year there was only one small stop, after which gold's price immediately shot upward. This chart suggests that a sharp rally is not a likely probability and that further consolidation is quite possible at this time.

$GOLD:$XJY (Gold - Spot Price (EOD)/Japanese Yen - Phliadelphia) CME/INDX

In the long-term chart of gold from the perspective of the Japanese yen, we see that the RSI level over 60 and this suggests that the local top may be in or is at least close. In the past, when the RSI held close to the 70 level for some time, local tops have been seen. Such is the case today. Prices are also close to the middle of the trading range but not at it, so a pause appears likely though not yet imminent.

So, will gold decline from here? Most likely yes, but not very far. The additional confirmation of the short-term bearish case comes from the general stock market, as gold has been recently moving in tune with stocks. Consequently a turnaround in stocks could ignite a move lower in gold as well.

$SPX (S&P 500 Large Cap Index) INDX

The next local top in stocks will probably be close to the level of the 2011 high. The recent trading pattern has been consistent with the period leading up to the local top in 2010-11. In October-November 2010, declining prices were seen for a few weeks but were quickly followed by a continuation of the rally. We may have a similar situation here.

RSI levels should be looked at as well and are also indicating that a rally is likely ahead. It appears that it could last for two to four weeks as the RSI level will then likely be close to 70. This has coincided with local tops in the past.

The short-term (and short-term only) bearish case for gold is further confirmed by the actual recent action in the silver market which has followed what we outlined in our essay (February 10th, 2012) on the likely silver pullback:

Silver's price has been in a sideways trading pattern during the past two weeks after a strong rally in which the red support-resistance line was pierced and volume levels were significant. With silver now above this line, it seems that a move back to it, a test of the breakout may in fact be seen. The 38.2% Fibonacci retracement level based on the 2002 to 2011 rally is also in play and will likely assist in stopping a decline as well.

(...)the medium and long-term outlook for silver remains bullish but - also based on the analysis of the USD Index - the short term is now more bearish than not.

Summing up, the outlook for gold remains bullish for the medium and long term but is now rather bearish for the short term.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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