Does Any Clear Picture Emerge From Gold And Crude Oil Charts?
Based on the June 7th, 2012 Premium Update. Visit our archives for more gold & silver analysis.
We have all seen the newspapers headlines about the troubles in Greece, Spain, Portugal, Ireland and the entire eurozone. The situation in the U.S. is not much better, even if the press is ignoring it for the moment. In both blocks there is high debt and large, long-term entitlement programs for citizens without any clear notion of where the money to fund these programs will come from. (Hint--the printing press.)
The global economic situation is unstable and untenable. How long can citizens in the West continue to buy more and more imported manufactured goods from the East? When the West's appetite for unessential consumer goods will lessen as people learn to do with less because they have no choice, the economic situation in China and South East Asia will be even worse than it is in the west. The West can always go back to manufacturing, but it's unlikely that Asia can go back to agriculture.
The month of May was possibly the worst month for gold prices in three decades, but it was unexpectedly followed on Friday, June 1, by the best daily climb--$66 -- since last August. The principal catalyst was the dismal US job report by the US Labor Department. Economists had hoped to hear about the creation of 150,000 positions, but the actual number was half that, 69,000, which brought on expectations of another round of QE, (that is, Quantitative Easing, not Queen Elizabeth who celebrated her 60 years Jubilee this week). It was interesting to note how the same financial media outlets that had eulogized the bull market just a week ago were now celebrating its return as a safe haven.
With that in mind, let's take a look at the technical picture. Let's begin with the analysis of the crude oil market (charts courtesy by http://stockcharts.com.)
In this long-term chart we see that oil prices continue their breakdown. This chart suggests that oil is likely to decline much more (to 74 or likely to 65 or even lower) and that gold prices have merely seen a small pause in their downtrend, much as was the case in 2008. The implications here are bearish for gold and the entire precious metals sector.
Now, let's move on to the yellow metal.
In the very long-term gold chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), we have three very interesting topics to comment upon this week. First is the interaction between the 300-day moving average (blue line) and gold prices. We see that prices moved to this level and then immediately declined. This moving average has been an important support many times in the past, which makes it important also this time. In 2008, in fact, it provided resistance when gold prices retraced after significant declines. This serves as a confirmation of what the crude oil price suggests.
Secondly, the RSI levels here appear quite bullish as they bounced after reaching the 40 level in a manner similar to 2003 and 2004. This in itself is a bullish signal. Finally, the breakdown below the black declining support line has been invalidated as gold prices have recently rallied. Although this line could be broken once again, the situation is simply not as bearish as when gold prices were below this line.
Turning to the Dow:gold ratio chart, we saw an invalidation of a breakout last Friday as stocks declined and gold prices rallied. The long-term picture for gold no longer is necessarily bearish based on this chart alone.
In this week's chart of gold from a non-USD perspective, we see that prices rallied strongly last week, but overall there has not been much change here. The previously broken support line has not been breached, and the technical picture remains mixed.
Summing up, the situation for gold is very difficult at this time. We have seen an invalidation of a breakdown below the declining support line. This is visible on the very long-term gold chart. We have also seen an invalidation of a breakout in the Dow:gold ratio chart, which is bullish for gold. At the same time however, crude oil is declining, gold prices are still below the 300-day moving average. From a non-USD perspective, the situation in gold remains overall mixed.
In our view the chance for a continuation of the significant decline in the following weeks/months is a bit over 50%. Details regarding implications thereof and details of the current speculative trade are available to our subscribers.
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Thank you for reading. Have a great and profitable week!