Gold's Royal Pain

It's been a torture for long-term holders of gold and silver-related stocks (myself included). Every day gold spot price tried to move up, but as soon as the U.S. stock market opens the U.S. dollar strengthened and gold sold off much more than the dollar's appreciation. The stock market ended up for the week, but my portfolio cratered because of the large gold/silver/miner stock positions.

On Friday, maybe, just maybe, the slide may have been arrested. On a daily chart, GLD, gold-tracking ETF, stopped at $109.32, right above the 50-DMA which has acted as support since August.

Below is a weekly chart of GLD with three sets of Fibonacci retracement lines. GLD seems to have stopped at 38.2% Fib line from the most recent run-up, which is about the same as 50% Fib line from the breakout from the long-term resistance (and therefore now hopefully a good support) around $100.


One great lesson for me was that I have to remember I am trading the paper gold and silver (ETFs and ETNs), not the physical gold or silver. I could have sold all off near the top and bought back, say on Friday. Transaction costs are negligible. But I held on to them as if they were physical.

Oh well. The gold spot is currently up $8.40 at $1,123.50. We will find out soon enough whether the gain holds when the U.S. stock market opens.

Gold Correction? Consolidation?

After tagging the all-time high of $1,226/ounce on Thursday last week, gold crashed on Friday on the strength of the U.S. dollar after the November unemployment number was announced. It sold off more than just just the dollar strength. The rumor was that the investors had margin calls and sold gold.

I don't know if they were margin calls on gold trade or the U.S. dollar trade. One possibility is that investors who were short U.S. dollar had to cover and unwound their carry trade (long gold).

A correction was overdue, as many say, as the rise after the October breakout was almost vertical. The candlestick formed an inverted hammer last week, indicating the trend change. The question is, how low will it correct?

This is a 3-year weekly chart of GLD, the ETF that tracks gold price. On Friday, the fall was arrested near 61.8% Fibonacci retracement from the long-term support (and neckline of the reverse head and shoulders) to the Thursday top. Since the rise in the past three weeks was particularly rapid, it could retrace back to 38.2% Fib, around $107, filling the gaps.


Slow stochastic (60,3) is still above 80 on the weekly chart, though it may be breaking below the recent trendline support. AROON's red and green lines are still very much apart, though this is a lagging indicator.

Looking at the previous breakout and correction (blue Fib lines in the chart), the level from which the breakout occurred held in the correction ($68.80). If that were to happen again, then the $100 level should hold.

The general market has been very volatile intraday these days, and the bollinger band on the major indices are contracting on the weekly charts. (Take a look at the latest newsletter about general market from Breakpointtrades.com.) Wait and see seems to be the name of the game for now for both gold and the general market.

Gold Is Finally Breaking Out!!??

Today (9/8/09), Barrick Gold Corp. (ABX), the world biggest gold producer, announced that it plans to eliminate all of its gold hedges and raise $3 billion in a share offering to help pay for the move, as gold breached $1,000 mark. (AP News link is here.)

Barrick Gold will join Newmont Mining in having their gold positions totally unhedged. They clearly see a plenty of upside and little downside in gold, going forward.

Gold went up to $1007 today, only to reverse back to where it started the day at $995, making the daily candlestick "gravestone doji", a reversal signal. However, I'm not too worried about short-term reversal, because I continue to like what I see longer term. Gold has to correct over 25% from here to get to my cost basis (I have DGP, double-long gold ETN), and like Barrick Gold's CEO I just don't see it happening.

This is Gold continuous contract, 3-year weekly chart. I tend to see the huge reverse head and shoulders formation that has taken 18 months to form. On shorter time horizon (since March this year), I see "ascending triangle pattern". Both patterns share the same neckline. Short-term, a break from the "ascending triangle" would be around $1160 (widest distance in the pattern plus neckline). Longer-term, a break from the "head and shoulders" would be $1320 (head height plus neckline).

However, gold doesn't necessarily move based on technicals. China is calling back its physical gold holdings from London to store them in a newly constructed vault in Hong Kong. It recently allowed its citizens to own and trade physical gold, and is planning gold ETF based on their gold holdings. I suspect gold's huge jump last week was at least partly in response to the news from China. Gold has a potential to break even further up, beyond technicals.

GLD: No Particular Place To Go

but it had better move one way or the other pretty soon, as it is running out space to go.

I have DGP (gold double-long ETN), which I have since last year (I accumulated over several months). I can say two good things about my holding gold via this ETN: 1) it is up 15%; 2) it never dipped below my average price. Beyond that, it's been very frustrating, particularly when other commodity stocks that I own have gained at least 70% this year.

Let's look at the chart of GLD (chart pattern is the same as DGP, different scale). This is a 1-year daily chart. It looks like it is still forming a more or less symmetrical pennant, fast running out of space to run. Other technical indicators - RSI, stochastic - are also running out of space. MACD is flat-lining, and volume has decreased significantly.

A pennant formation is usually a continuation pattern, and tends to break in the direction before the pennant is formed. In the case of GLD, that direction is up. The target price of the pennant, I learned, is the length of the "flag pole" added to the place of the breakout; if it breaks out upward from $95, add the flag pole length of about $30, and you get $125. Should it break down from, say $92, then it could go below the November 08 low of $68.


Gold bugs decry manipulation by central banks and gold dealers (many of whom happen to be Treasury Primary Dealers also). I do understand their chagrin. On many days, spot gold price is high before the U.S. stock market opens, and as soon as the market opens the gold price is slammed down (like it happened today 8/26/09). Oh well. This is my "disaster insurance" holding which happens to take up 1/5 of my portfolio. I just have to make more money elsewhere...

Silver Correlates Better With Yield Rise Than Gold

But copper and iron are outpacing the yield rise. For now.

The stock market is responding favorably to today's auction of 30-year Treasury bond, although it has come off the high of the day. (It is possible it will end up flat, yet again, like the past 4 trading days.)

But yields have been rising on long dated Treasuries, most notably 10-year note and 30-year bond. Treasury/Fed/Government spin is that the economy is recovering. Maybe. Maybe not. I also hear a lot of inflation talk, even hyperinflation talk. Jim Rogers has said that Dow could go to 100,000 (or some outrageous number like that), and a quart of milk could cost $10.

Even the staid broker like Fidelity (I use them) puts out an article about how to profit from falling US dollar and rising inflation. Their recommendation: gold, silver, commodities. (They also recommend REITs and TIPS, but never mind them for now.)

So I plotted gold (via gold ETF GLD), silver (SLV), 10-year note yield (TNX) and 30-year bond yield (TYX) on a 6 month daily chart. (I threw in Apple (AAPL) just for fun, and surprisingly it correlates to silver pretty well.) First to note is silver's outperformance over gold in the past 6 months. Second, notice how well silver correlates with the Treasury yields. SLV is a thin blue line buried among TNX, TYX, and AAPL.

So the better inflation trade is silver?

Maybe. Maybe not. This second chart adds a few more names - companies that deal in other metals: Freeport McMoran (FCX, copper), Rio Tinto (RTP, aluminum, copper, gold), Mechel (MTL, iron ore, coal, steel), and AK Steel (AKS, steel). They are all outpacing the Treasury yields.

Gold

One of the non-performers in my holdings is the gold double-long ETN, DGP (the other non-performer being another ETN, oil double-long DXO). I purchased the stock during October-December period. My average cost is about 5% below today's price, so I haven't lost money but haven't gained much either. With all the financial market turmoil and capital dislocation, gold has not performed as many gold bugs hoped for. It's been a dead money, so to speak. The gold spot price is currently $897.

It seems many people love to hate gold. When the price goes up, they say "Oh it's a head-fake, good time to short". When the price goes down, they say "Gold as money is such an archaic concept, not relevant in modern world".

I'm planning to hold on to this stock (or I may switch to GLD so I can write call options against the holding) and I'm prepared to double down if it goes down to November low, as I am scared of the monetary base growth and the ever-growing size of Fed's balance sheet. But just in case, I took a look at the chart of GLD (gold ETF). It looks to me like a W-bottom with a handle. And I'm pretty OK with the current setting, as long as the handle-low holds.

Potential move down for gold this week is Treasury auctions. So far, the "safe haven" play is a battle between Treasuries and gold. This is from Yahoo Bond Ticker on Monday:

"Today the market absorbed a $40 billion sale of 2-yr notes, a $29 billion sale of 3-month bills, and a $28 billion sale of 6-month bills. The Fed took a small step to offset the increased supply with a $7.025 billion purchase of securities with maturities ranging from September 2013 to February 2016.

"Tuesday's auction calendar will be highlighted by a $35 billion sale of 5-yr notes. That auction, the swine flu fixation, and the economic data are expected to be the drivers of Tuesday's trade, but the order of their importance is indeterminate at this time."