The Missing Tell-Tale Sign of a Lasting Gold Market Low

The best time to buy is when there’s ‘blood on the street’ or when investors throw in the towel and all the weak hands are purged out. How can you tell when that’s the case? Here’s possibly the only way to identify the ‘puke point’ for gold.

Based on the Commitment of Traders Report (COT) and gold assets held in gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU), we know that investors/traders do not want to own gold right now.

In fact, both sentiment gauges have plunged to 5-year lows. Sentiment surrounding the precious yellow metal is bearish enough to spark a rally.

The big question is whether any rally will be fake and short or real and long.

At major market bottoms investors generally throw in the towel. Some call this the ‘puke point,’ where all the weak hands are purged out.

We’ve seen such a ‘puke point’ for the S&P 500 in March 2009 and once again in October 2011 (the Profit Radar Report identified both of them).

The opposite of the ‘puke point’ is the extreme infatuation seen around gold’s nominal all-time high in September 2011. Everyone wanted to own it. When everyone is scrambling to buy an asset from you, it’s best to give it to them.

Via the August 24, 2011 Profit Radar Report I warned subscribers that: “I don’t know how much higher gold will spike, but I’m pretty sure it will melt down faster than it’s melting up. We should see sellers en masse.”

Unlike the S&P 500, gold has been in a bull market for most of the 21st century. This means that data mining for past market bottoms is difficult, especially when looking at gold ETFs with price history limited to eight years.

Nevertheless, the chart below should be helpful in spotting a lasting gold bottom.

The chart plots the price of gold against gold (in tons) held by GLD and IAU.

The red graph at the bottom shows the 5-day average combined trading volume for GLD/IAU.

Gold assets have been in freefall mode. This shows us that gold may be oversold, but that’s about it.

The volume data is much more insightful. There’s been a volume spike at every prior gold low – the puke point. But there hasn’t been a volume spike recently.

The absence of obvious mass surrender suggests that a lasting gold bottom has yet to be seen. My most recent Profit Radar Report includes ideal targets for this major gold low along with short-term key resistance.

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

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Gold – Why The ‘Safe Haven’ Metal Has Fallen Out of the Sky

On Thursday, gold prices tumbled to the lowest level since September 25, 2010. After a 33% slide, the SPDR Gold Shares (GLD) – once the largest ETF in the universe – is officially in bear market territory. Why? Will it last?

Not everything that shines is gold and even the real stuff is worth much less today than yesterday, or any other day since September 2010.

Gold, the last honest asset and conscience of the financial world, reminds complacent investors of a time-tested but forgotten principle: What goes up must come down.

Gold’s fate has been a frequent topic of discussion in the Profit Radar Report. Ever since the April 16 low of $1,321/oz, the Profit Radar Report has been expecting a new low in the 1,250 – 1,300 range.

One reason to look for new lows came from a basic but reliable indicator – RSI (Relative Strength Index). There was no bullish RSI divergence at the April 16 low.

Weeks of sideways trading allowed RSI to reset and hold up much better than prices. A bullish RSI divergence is now in place (see chart).

The CBOE Gold ETF Volatility Index (GVZ) also suggested a new low. GVZ basically is a VIX or ‘fear barometer’ for the Gold ETF (GLD).

The chart below plots the SPDR Gold Shares (GLD) against the CBOE Gold ETF Volatility Index (GVZ) and provides an update to the chart featured in the April 16 Profit Radar Report.

The December 2011 bottom was accompanied by, what I call, a volatility divergence. Volatility at the initial September 2011 low was much higher than at the December 2011 low.

Volatility divergences are not unique to the gold market. In fact, similar volatility divergences helped me identify major stock market lows in March 2009, October 2011 and June 2012.

Yesterday’s new low for GLD and gold prices was accompanied by such a volatility divergence.

Setup For a Buy Signal

Based on technical indicators, the conditions are in place for a low. Investor sentiment is extremely bearish, which is conducive for higher gold prices.

However, we need to remember that gold has been in a 10-year bull market and therefore should not overvalue the current sentiment extremes. The fact that gold prices haven’t been able to get off the mat in weeks, despite bearish sentiment extremes, suggests that gold has entered a new environment – it used to be called a bear market.

Regardless, we expect some sort of a gold bottom in the 1,250 – 1,300 range with the potential for a powerful bounce. The conditions are right to start fishing a bottom, but there’s no reason to be careless. Lower price targets are still possible.

The focus of the Profit Radar Report will be on finding low-risk buy levels that gives us all the benefits of a nice rally without any of the pain of being wrong or too early.