November 27, 2012 – The Trend is Gold’s Friend Again: Last week, while investors were enjoying a nice stock-market rally, gold quietly broke out to the upside. After months of floundering, the yellow metal has now confirmed the resurgence of its long-term rising trend.
If there ever was an asset that embodied the spirit of Mark Twain’s famous quote, “The reports of my death have been greatly exaggerated,” it is gold. From calls of a burst bubble in September 2011 to an apparent, albeit incorrect, view of a major trend breakdown in May 2012, the precious metal has ignored the consensus opinion that its best days were behind it.
Analysts argued that low levels of inflation would render its hedging qualities unnecessary. And a strong U.S. dollar, thanks to the continuing economic problems in Europe, would continue to pressure it. Since the metal is priced in dollars, a rising dollar can buy more ounces of gold, all other factors held constant, and that results in lower prices.
Gold is now trading above its 50-day moving average for the first time in a month after recently bouncing off its longer 200-day average (see Chart 1).
Its Nov. 23 gain also moved it above short-term resistance at $1,740 an ounce and confirmed the end of an October correction. In Monday’s session, gold traded at $1,750, down slightly from Friday’s close.
The next hurdle for the market is in a zone around $1,800, a resistance level set by short-term highs made in November 2011, February 2012 and early last month. If the bulls are successful there, I see no technical reason why it will not top last year’s all-time high of $1,923 within just a few months.
While gold is just now confirming its bullish tone here in the U.S., Europeans were already quite aware of its bull market. When priced in euros, gold moved to an all-time high in September of this year (see Chart 2).
Gold Priced in Euros
With exchange-traded funds as proxies, investors can use any charting software, such as the free Stockcharts.com, to plot this relationship (shown above in Chart 2). Simply create a ratio of the SPDR Gold Trust (ticker: GLD) divided by CurrencyShares Euro Trust (FXE).
The rising trend from 2008 is clear and intact. And while gold priced in euros backed down from its all-time high during October, the configuration on the chart suggests nothing more than a normal correction in a bull market.
Indeed, most of the world’s major currencies show similar long-term bull markets in gold. Japan might be the exception as the chart of gold priced in yen shows a large trading range, rather than a correction and upside breakout, since last year’s all-time high. Gold priced in yen is in the midst of a strong short-term rally that is now about to reach the top of the larger trading range. That suggests it is nearing a price at which previous rallies stalled.
Gold mining stocks have taken a different path from the metal but were in an area representing good long-term value. Gold stocks are still struggling as the rest of the stock market started the new week with a loss. But I consider a breakout in the metal to be a good reason to continue to look at these stocks favorably, albeit with an expectation for a bumpy road ahead.
The long-term trend remains to the upside and supporting technicals such as moving averages and momentum are starting to add to the bullish case. With or without mining stocks in tow, investors should not write off the metal, no matter what many experts say. (Credits: Barron’s Magazine).
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