Gold: Still Long Term Bullish, But Prepare for a Pullback
After experiencing a remarkable bull market run from $250 an ounce in 2001 to $1,900 an ounce last summer, gold has not had an easy time of it since.
Three times it plunged as much as 19%, and rallied back, only to run into resistance each time at $1,800. It is potentially doing so again.
That’s probably puzzling investors who have been seeing so many big-name analysts and fund-managers become very bullish for gold, with reasoning that seems sound.
The latest Reuters poll shows precious metals analysts have become more bullish for gold and silver than they have been in several months.
Even technical analysis was backing the bullish outlook. My technical indicators triggered a sell signal on February 19, almost exactly at that peak, but had me and my subscribers back on a buy signal in mid-August and back into a 20% position in the gold etf GLD.
The case for gold, at least from the fundamental side, still sounds bullish.
As Ray Dalio, chief investment officer at Bridgewater Associates, the world’s largest macro hedge fund recently told CNBC viewers, “We have a situation where there is too much debt, which leads to central banks printing money, which is bullish for gold.”
Other analysts add that fears of the looming ‘fiscal cliff’ in the U.S., and possibility that rating agencies will downgrade the credit rating of the U.S. again, are positives for gold over the next several months.
There is also the expectation that the Fed’s latest QE3 program will be inflationary, and gold is the traditional hedge against inflation.
Then there is the history that gold often (but not always) moves opposite to the U.S. dollar, and the dollar has been in a decided decline since July.
So what is going on that gold’s latest rally attempt again ran into resistance at $1,800 an ounce, triggered a sell signal on technical indicators like the Stochastic Oscillator, and gold has plunged $70 an ounce over the last couple of weeks?
I’m still long-term bullish on gold and its problem is probably just that sentiment for gold became over-heated and needs to cool down some.
For instance, according to Reuters, gold’s spike-up rally since August had investors piling into gold etfs at such a pace it forced the etf’s to raise their holdings of bullion to a record 2,681 metric tonnes.
And CFTC data shows hedge funds have raised their gold futures holdings to their highest levels in almost 14 months. The extreme bullish sentiment for gold could also be seen in the excitement for it on the financial TV shows.
So perhaps gold’s problem will be relatively short-term, perhaps a pullback to the previous support at its 30-week m.a., just to get the sentiment cooled off some before the upside resumes.
But with the 30-week m.a. at $1,650 an ounce, even that would be a $140 an ounce decline from its recent high, not something I’m willing to endure.
And given the way gold’s long bull market potentially topped out last year and has a potential triple-top in place, maybe there’s something more fundamental going on.
Could gold possibly be saying that the ‘fiscal cliff’ will be successfully resolved? Or that central banks are going to aggressively sell gold from their reserves to raise cash to help with their debt loads? Or that the global economic slowdown will continue and result in deflationary pressure rather than rising inflation?
I don’t have the answer to those questions. So I suggest simply following the charts and letting the indicators tell us when the downside momentum and money flow reverses to the upside enough to trigger our next buy signal.
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