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All That Glitters…

gold-flag-fib

Well, look at that. BIG rally in gold today that has everyone baffled. What is it telling us???

Is it a flight to safety? Probably not as the dollar was down today. Unless of course its a flight to safety away from paper currencies because of some geopolitical event – potential Israeli attack on Iran’s nuclear facilities? The entire Jewish state has been participating in safety and preparedness drills in anticipation that Iran or other Arab nations will retaliate.

Is it fear of inflation? Probably not as the 20-year treasury bond was up today as well, and long bonds always tank with any whiff of inflation. But the selloff in the dollar coupled with the rise in gold has the dollar bears shouting their hoodie-hoos.

Is it demand? The biggest buyers of gold, the families of India, are not pushing up demand – in fact, demand from China surpassed India recently.

Is it fear of a collapse in the financial system? Probably not as the TED Spread has not jumped like it did last Fall.

So, what is it? My best guess is that it is a simple sector rotation into gold. The gold company index was up almost 10% today, four times the up move in gold itself. Gold has been a very stable investment this year. It didn’t tank like the rest of the market going into the March lows, but it hasn’t rallied like the rest of the market since then.

From a technical perspective, going back to 2007, you can see that gold has wanted to breach 1,000 several times. It achieved it for a short time in early 2008 as the extent of the sub-prime problems started to become known, but that quickly reversed itself. Each time it makes an assault on 1,000, the Fed or other cental banks intervene and push the price back. This yields tremendous technical pressure to finally move it higher – most institutional investors realize this and know that the macroeconomic climate (all of the monetary stimulus) will eventually result in a far weaker dollar and significantly higher oil and gold prices.

Is this the beginning of that big move higher? You can make a case for a $1387 as a price target: 1033+(1033-679) = 1,387 i.e., the Feb 2008 high plus the difference between the Feb high and Oct 2008 low. You never know if this is the beginning of that move, but if we break through the triangle I’ve drawn on the chart (the two blue lines) technical analysis tells us that historically, 67% of the time, the breakout will be to resume the most recent primary trend, and that trend is up (see the Oct 2008 to Feb 2009 move from 679 to 1000). So, we could easily move back to the Feb 2009 highs and maybe higher.

At some point we will move much higher – the monetary stimulus guarantees it, in my opinion. But this time? The Fed or other cental banks may intervene and push it back down – their push back will work until the buying momentum breaks their efforts and then the move to 1,387 will be at first very strong, then back and fill until we get there.

The $22 move up today was big and took us up to the trendline on the triangle. We will have to see what tomorrow brings and what actions the central banks take. At some point, it will be more appealing to them to hold onto their gold as the price appreciates than to sell it on the open market – principally to China who dumps dollars in exchange for the precious metals – in an effort to lower the price. That time is coming and we will know it when we see it.

As far as the stock market goes, we had a barely down day after the market bounced around on either side of break-even. The market is sitting on the 34-day EMA support line with the 50-day SMA support line in its sights. It is also bumping up against the 50% retracement level from the pre-Lehman Brothers bankruptcy level to the March lows. Can the 34-day and the 50% retracement hold? Let’s hope so.

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If not, we implemented the Profit Protection Plan described in a post last week and sold a lot near the recent top, as well as had several trailing stops activated. We are keeping a close watch on our individual holdings as well as the broader market. Right now, the primary intermediate trend is still up. No short-term moving averages have crossed longer-term moving averages to the downside. Until that happens (and you can see the 13-day EMA starting to curl over) we remain in an intermediate term uptrend waiting to see if we are going to break out of the longer-term secular bear market dating back to 2000. We don’t look for that anytime soon, we just invest what the market gives us right now.

On an unrelated note, congratulations to my friends at the United Way on their Campaign Kick-off today. With the State of Illinois and the Federal Government in such a shambles, many people are suffering due to cuts in governmental grants. The agencies that receive funding through the United Way need your help so please find it in your hearts to give generously. The due diligence process they employ helps to ensure your money goes to the agencies that will deploy it most effectively and ultimately to the people most in need. If your business does not engage in a work place campaign, feel free to call your local United Way office (in Champaign County its 352-5151) and they can help you get one started. Giving a small amount each paycheck allows you to give more over the course of the year than trying to write the one big check each year – and chances are that if you are reading this blog you can afford to help those in need. I am pledging publicly on this blog to increase my donation by 10% this year…anyone up for a challenge?

Enjoy the rest of your evening and I’ll keep you posted on our investment management activities and where we see the market(s) headed.

Mark