FMX | Connect – www.fmxconnect.com - (Reported 5/10/2010)
Commodity Trader’s Chart Book: Gold Update
Dan Wantrobski CMT (215) 665 - 4446
Several commodity charts require updating from a technical perspective- but with recent events triggering a sharp flight to quality last week, we would like to focus on gold this afternoon. We continue to be amazed (maybe we should be concerned…) at how many commodities (including gold) have been acting well against a stronger dollar over the last several months. Our opinion is that it is a function of the ongoing ‘mean reversion’ recovery here in the States, which allows many of the industrial-type commodities to benefit from an economic reflation against the backdrop of a stabilizing currency. But with respect to gold prices, it may be signaling that old inter-market relationships are starting to fade as global uncertainties and liquidity concerns lead to a more risk-averse investment community going forward.
Gold: we’re buyers over the short run…
In the event of a retest of the stock market lows posted last week (which we think is possible), we believe gold- acting as a safe haven- would benefit.
There has been a minor breakout on the daily charts of gold- prompting us to stay long the precious metal above $1130-1140 initial support, which is the metal’s rising 50-day moving average.
Gold: Relative strength vs the S&P…
But aside from recent technical developments on the daily charts, from a secular standpoint, gold remains within a long-term bull market relative to the S&P 500. Beginning around the years 1998-2000, gold transitioned from a secular bear market (1982-2000) just as U.S. equities markets peaked and transitioned from their secular bull market. So despite the shorter-term nominal price volatility, gold prices have actually outperformed the S&P 500 for the last decade- as evidenced by the RS chart above (to the right of the vertical black line, which denotes the year 2000). At this time, we do not see any major trend line breakdowns on this chart- rather the ratio has turned higher off its rising 30-month moving average, which is bullish in our view.
The strong negative correlation between gold prices and the dollar (chart above) has weakened considerably- especially last week when both acted in the capacity of global safe haven. As we pointed out this morning, if the major equity benchmarks fail to break back above their respective 50-day MAs- or perhaps if only some are able to manage the advance (a sign of sector rotation / deteriorating breadth), then we could easily see a rollover in equities to retest the panic lows set on Thursday, in our view.
This could benefit gold: just as we’re seeing the negative correlation to the safe-haven dollar fade (which argues that gold is transitioning away from being a risk asset toward becoming a safe haven), we are also seeing the positive correlation to the risk-laden S&P 500 weaken:
This daily correlation chart above is showing how gold may be decoupling from other risk markets (such as U.S. equities) over the short-run. This would benefit gold prices on a relative basis in the event of another stock market decline, in our opinion.
We would also note that net long gold contracts- data provided by the CFTC- have been reduced from their all-time highs. This to us suggests there is no pervasive bullish sentiment surrounding the commodity at this time (a typically contrarian indicator):
The charts above suggest to us that gold prices may be decoupling themselves from other risk markets – and aligning themselves alongside the U.S. dollar as a safe haven trade. If current correlation trends continue, gold prices will then likely outperform the equity markets in the event of another market decline / panic.
There are two risks to this bullish call for gold:
1. The longer-term charts of the metal look overbought / extended at current levels
2. As correlations weaken, if the cyclical bull market in U.S. equities resumes, gold prices will likely underperform
1. Longer-term charts overbought…
This weekly chart of gold prices shows the metal overbought against its long-term moving average (green line,) plus a minor divergence with its MACD indicator (lower portion of chart): the metal has made higher highs (on a weekly closing basis) while its MACD is making lower highs. Not a major bearish signal right now- but this in conjunction with the extended weekly chart suggests stops should be placed below the 50-day moving average ($1130-1140), as a break there would constitute a shift in trend.
2. Cyclical bull in equities…
As we mentioned in this morning’s Chart Book, the events of last week represented a ‘bull market correction,’ rather than a cyclical market top. Therefore, if the cyclical uptrend in the S&P resumes in the weeks / months ahead- as correlations between the S&P and gold prices weaken- it would lead to underperformance in gold, as the risk markets benefit from investors’ renewed appetite.
What we are playing…GLD
The GLD sports a high positive correlation to underlying gold prices in our opinion. Therefore, investors looking to position this call should consider the ETF with stops below the $108-110 support area:
Gold prices and the GLD are not only making new recovery highs against this global turmoil, they are also close to breaking out to new all-time highs. Anyone who is skeptical of a recovery within the equity markets going forward should thus consider this area of the markets as a place to invest- especially in light of how it has been acting against a stronger dollar, in our opinion.
Full Credit to:
Dan Wantrobski, CMT
Janney Montgomery Scott LLC
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