Gold is still one of the best long-term bets going, but recent action should have all gold holders worried. More than that, the brightest of the golden bulls might even consider outright dumping their liquid gold hoard before the current slide turns into a washout then into a broken back.
Consider the chart:
Let's not mince words. Gold has been in distribution for roughly four months. That's evident from the head and shoulders pattern seen on the chart above and from the rotten RSI and MACD indications, both of which point up weak action as far back as mid-October.
Look also at the support line that underscores the trade from mid-October through mid-January (in red, above). Support was broken a month ago and GLD is now struggling to retake that line, which has now become resistance. As of Wednesday's close, GLD sits precisely at the line.
In its struggle to move higher, GLD has formed a pennant pattern – what technicians consider a continuation pattern, (read: continuation downward). Volume corresponding to the current pennant formation has also been weak (see blue line, above), further confirming the likelihood of additional downside. Higher prices on lower volume, in general, are clear signs of weakness.
Finally, while it's true that RSI has now splashed above its waterline, MACD is still submerged, torpedoing any hope at this stage that we're witnessing anything but a bullish pause within an ongoing intermediate bearish move.
And what about this:
Outside of hedge funds unloading their gold, maybe the selling pressure is coming from European central banks looking for a way to deal with their ongoing debt woes? Hard to know.
Also not important. For now, it looks like gold's bit the fricker.
Watch Your Language, Arse
That brings us to the issue of sentiment, which we've been beating like a bleedin' tom-tom for over a month now. Does this indicator count for anything anymore?
Consider the following. Merrill Lynch released a report earlier this week showing money managers now more bullish than at any time since the survey was initiated. The piece goes on to say that
"A net 67 percent of respondents, who together manage $569 billion, had an "overweight" position on global equities, the highest level since the survey first asked the question in April 2001. That compares with 55 percent in January and 40 percent in December. Meanwhile, a net 9 percent is "underweight" cash, the lowest allocation since January 2002."
The money managers look to be all in.
A good thing?
Interestingly, these managers' emerging market equity exposure is down to five percent from January's 43% reading.
Maybe time to travel overseas?
Newsletter writers are also bullish
Yours truly notwithstanding, newsletter writers are currently bullish out the wazoo. NASDAQ market timers bullish sentiment now stands at 73%, up from just 46.7% last month.
Yikes!
On top of that, AAII's weekly investor survey has been running above its historical average of 39% for 24 consecutive weeks now, the second longest such streak in history.
Yet with all that, stocks have crept higher
They don't stop creeping higher.
Will they creep higher forever?
Speaking of Gold and Stocks
The yellow metal isn't the only commodity struggling these days. According to the chart below, the entire commodity complex, as represented by the CRB Index, has underperformed equities, both off its March, 2009 low and as a function of distance from its 2007 highs.
Stocks have almost doubled off the '09 bottom, and commodities are still nearly 30% off '08 highs.
The trend has become more obvious of late as commodities have become decoupled from stock prices. As the chart below shows, commodities took their cue from equity markets in 2010, rising with the stock market as the global economic recovery gained traction. But lately it looks like there's a new calculus being applied. See here:
Are futures traders back to examining supply/demand fundamentals? And could that lead to a revaluing of some very troubling speculation going on of late in the softs?
We'll see.
We'll also bet on the shine coming off foodstuffs in general.
Call it like this: a simultaneous retreat in the CRB (maybe played with the DBA ETF) and the S&P 500 – along with a who-could-have-guessed-it flight to an oversold Treasury market.
Oh, go on!
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
