Nice run for gold, eh?

by JDH on August 25, 2012

My apologies for using the Canadian word “eh” in the title, but hey, it’s been a nice run for gold these last eight days, eh? Since the $1,900 peak reached at the end of last summer, about a year ago, gold has dropped, and then began to recover.  Gold is about $160 lower than where it was a year ago.

However, here’s what’s remarkable: From the low after the crash in 2008 to the peak in 2011, gold increased about 170%.  That’s quite a run.

From the peak in 2011 to the numerous bottoms this year, gold has dropped around 20%.  That’s it.  After a run of 170%, gold has only given back 20%?  That’s an amazing run, and quite obviously is not a collapse.

But is gold getting ahead of itself?  A look at a daily chart suggests that it is:

A quick perusal of the daily chart for the last three years appears to indicate that gold is oversold.

The Relative Strength Index (RSI) closed on Friday at 73.32, the highest level since the beginning of February.

As the chart shows, gold is able to trade above the typical oversold level of 70 for many weeks at a time, but 70 tends to be the level where tops are formed, not bottoms.  That is worrisome.

However, the RSI can remain above 70 for many weeks, so even the daily chart is not proof of an imminent decline.

Further, the MACD, at the bottom of the chart, is nowhere near the oversold levels above 50 that we reached at the top a year ago.

A daily chart is subject to considerable volatility; let’s take a step back and look at a weekly chart, which is better at smoothing out some of the day to day ups and downs:

The weekly chart, and in particular the RSI calculated on a weekly basis, is much less worrisome.  In fact, the RSI at 56 is almost perfect.  From oversold levels the RSI has “picked up steam”, and is looking good.  Most technicians will tell you that a cross over 50 is bullish, so we are at a very bullish place. The action on the MACD would appear to confirm this.

Even better, the obvious support level just above $1,500 (the horizontal green line) is holding, and the down-trend line on the weekly chart is in jeopardy of being breached; also a very good sign.

I like it.

Let’s review one more chart of gold, with a P&F chart.

The breakout is obvious on a point and figure (P&F) chart.  There was an ascending triple top breakout on August 21, and the next resistance level is around $1,780.

That’s encouraging.

Very encouraging.

And yes, I said one more chart, but I’m in a charty mood today, so let’s go from a three year view to a one month view, which is also interesting:

I’ve drawn a box around the price action on Tuesday, Wednesday and Thursday of this week.  What do you notice?  I observe that all of the “candles” are essentially the same height.  Weird, eh?

On each of those three days the price of gold increased by just under 2%, but no more.  It’s almost as though some mysterious, mystical force was holding down the price.  Here is a quote I made up from some “higher power”:

We know gold is going to the moon, or Mars, and we don’t want it to get there too fast, so we will let it gradually increase, but by no more than 2% per day, since we don’t want to alarm the citizens and expose the rotten house of cards that is our financial system.

The quote is made up, but I suspect the sentiment is real.

One more thing: take a look at the blue circle I drew around the volume at the bottom of the chart.  Even though the price increase stalled on Friday, volume continued to increase.  That’s bullish.

If the charts don’t prove my point, let me spell it out for you:

For the last ten years gold has enjoyed a bull market.  As will all bull markets there are corrections along the way, some longer than others.  We are ending a year long, 20% correction, which is very healthy for a bull market.

After a year of base building, we are poised for take off.

The fall is a decent time for gold.

Govern yourself accordingly.

Thanks for reading; we’ll chat again next week.




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