Two sets of forces work on market prices. Internal factors, or market's technical conditions, can in some periods dominate all others. Second set of forces are fundamental factors. Latter is that which is happening in world that might influence market. The much enjoyed rally from last summer's lows to the joyous move above US$1,000 was driven by latter. Investors wanted to protect their purchasing power from collapse of purveyors of paper assets. Internal factors seem now to be more important at the present time.
In this week's chart, the green line portrays the six month rate of change in monthly average $Gold price using right axis. As a measure of price momentum, it helps in assessing technical nature of the market. An observation approaching 40% appears to be an abnormal reading, or indicative of a seriously over bought condition.. Last time $Gold's return approached that level, return on Gold turned down. That appears to again be happening. This writer's view is that technical factors are dominant at this time, and imply $Gold price weakness rather than strength.
On the fundamental side, red line is six month rate of change for U.S. money supply, M-2, annualized using left axis. Until recently, the two seemed to have some commonality. Creating U.S. dollars at a faster rate tended to cause return on $Gold to rise. That view seems reasonable. Now with Federal Reserve abandoning restraint, U.S. money supply growth has exploded to highest level in years. Producing more dollars at a faster rate should cause value of dollar to fall and $Gold to rise.
However, the market correctly predicted the Fed's actions and discounted them in advance. The technical factors and the discounting in advance of Fed actions seem to be dominating $Gold. Given these factors, this analyst would expect $Gold to stage short rallies followed by continuation of correction. First intermediate buy signal has already been given. Expect more to follow as usually takes a number of oversold periods to create the end of a correction. Since we will never know till after the fact final low for this correction, investors should commit part of their cash to Gold on each price decline that creates an over sold condition. You do want to own Gold for the final ride to more than US$1,500, but getting on the train at the right station can increase the pleasure derived from the ride.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html.