Three Reasons Gold Might Be Making a Head Fake
Commodities / Gold & Silver 2009 Nov 11, 2009 - 03:25 AM GMTBy: Graham_Summers
As many commentators have pointed out Gold has been on an absolute tear during the last month, soaring above $1,000 before closing at an all time high of $1,092. Since that time a number of investing heavyweights (Jim Rogers, John Paulson, etc.) have begun predicting gold prices of ranging from $2,000-$5,000.
I don’t disagree with these gentlemen in the long-term. If you’ve read my Special Report on Gold How to Buy Gold For $188 an Ounce, you know that I forecast gold would erupt higher in September-October. You’d also know that I believe we could very well see Gold hit unbelievable levels at some point in the future.
However, right now, I’m concerned about Gold’s recent rise. Do I think the precious metal could go higher from here? Absolutely. But there are a few issues that make me believe Gold could just as easily collapse from here or at least stage a sizable correction.
Reason #1: Gold has failed to hit new highs against world currencies
Gold may have hit a new all-time high against the US Dollar… but against other world currencies (the Euro, Yen, Swiss Franc), it has yet to beat its former recent highs. Put another way, Gold has yet to truly erupt in REAL purchasing power against other fiat currencies.
Priced in Euros, Gold’s got another 7% or so to go before it hits a new high.
in Yen, Gold needs to rally another 3% to hit a new all-time high.
And in Swiss Francs, Gold’s got another 5% to go.
Looking at these charts, you can argue that Gold already broke higher against the Dollar because of that currency’s weakness and that it will soon take out new highs against the other currencies too. However, until gold DOES hit new-highs against other major currencies, there is the possibility that this latest run is merely about Dollar devaluation and NOT a real genuine breakout in purchasing power of Gold.
Reason #2: Other precious metals have not confirmed the breakout
Gold and silver generally trade in-line with one another barring extreme circumstances (e.g. the Hunt brothers trying to corner the silver market, or November 2008 when silver was destroyed by deleveraging).
Indeed, Silver has largely followed Gold’s action in the last 10 months right up until a month ago when Gold exploded higher:
As you can see, Gold has gone straight up since late-October. Silver, on the other hand, has failed to break to a new high. Put another way, Silver has failed to confirm Gold’s breakout.
The same goes for Platinum:
In fact, when you compare Gold (red) to precious metals (black) in general, you see that Gold has jumped well ahead of its family:
Reason #3: Gold miners are not participating in the breakout
Gold and gold mining stocks generally tend to trade in line with one another. In fact, they are so closely related that gold mining stocks generally trade more closely to gold than to stocks in general: the below chart shows gold miners (blue) follow Gold (black) and NOT from the S&P 500 (red).
Look at the above chart carefully for the month of October 2009. As you can see, Gold (black) erupted higher, but gold miners (blue) have failed to break to a new high. In fact, gold miners look to be putting in a “double top” which tends to forecast a correction. If we are to believe that Gold has truly decoupled from its “dollar hedge” status then we need to see gold miners confirming the breakout. Right now they’re not.
To conclude, Gold, priced in Dollars, is certainly heading into the stratosphere. But so far neither precious metals nor gold miners are confirming the move. In addition, Gold has yet to break to new-highs against other major currencies. This leads me to believe that Gold’s recent jump is overdone and in fact may have been the result of a mini-Gold mania induced by hyper-inflationists of fear of inflation taking over the market.
I remain bullish on Gold in the long-term. With central banks around the world printing money the precious metal is set for some fantastic gains down the road. But I think this latest rally to $1,100 or so looks overdone.
Unless we start seeing confirmations of Gold’s breakout coming from other precious metals or gold mining stocks, then we could very well see Gold stage a massive reversal in the near-term. A Dollar rally (which I believe may be starting) would certainly hit Gold hard since most of the precious metal’s gains have come based on Dollar devaluation (see Reason #1 above).
Keep a close eye on the other precious metals and gold miners. Unless they start joining in the Gold party soon, then we could very well see a Gold correction back down to $1,020 or even $1,000.
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Good Investing!
Graham Summers
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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