Gold Swings from Long-term Over-hated to Short-term Over-bought

Gold was over-hated just a few weeks ago. The July 21 article “Gold Looks So Bad, it Might Actually be Good” observed the following:

  • Gold is having another bad year, and most ‘pros’ are looking for even more losses:
  • “Gold teeters near five-year low after ‘bear raid’, more losses expected” – Reuters
  • “3 Trends that are burying gold prices” – CBS News
  • “Why gold is falling and won’t get up again” – MarketWatch
  • “The one chart that shows that gold may not be as safe as you think” – The Independent

Every gold bear should know that the market has a nasty habit: It likes to fool the crowded trade.

Based on the above headlines, short gold is the crowded trade.”

Click here to view the chart that suggested a gold rally was due.

This week, gold gained as much as 3% (gold rallied as much as 5% from the July low).

However, sentiment has quickly swung from long-term over-hated to short-term overbought.

Yesterday’s (Wednesday’s) Profit Radar Report stated that:

Gold popped this week and is short-term overbought against resistance. Due to the extreme pessimism, gold may shrug off the overbought condition better than normal, but the vertical gray lines suggest a pullback.”

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The following chart went along with yesterday’s PRR update:

Based on sentiment and seasonality, the gold rally should continue for a while longer, once this pullback is complete. A drop below 1,100 would caution of a relapse to new lows.

Continuous gold analysis is provided by the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, 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. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Is Now the Time to Buy Gold and Gold Miners?

Gold was the most hated asset class going into December, especially after Swiss voters rejected a proposal to boost the country’s gold reserves by some 1,500 tons (about 7% of global annual demand). Is this a good ‘blood in the streets’ trade?

Massive. That’s the only way to describe The December 1 overnight reversal of the gold futures (following the Swiss no vote).

In fact, price action painted two giant green candles. One marked the November 7 low, and than there was Sunday’s.

Two trading days before the November 7 low, the Profit Radar Report wrote: “There is a bullish divergence and gold has finally met our long-term down side target. Gold seasonality for November is bullish. Sentiment, seasonality and the bullish technical divergence increase the odds of an upcoming buying opportunity. We will dip our ‘toes in the water’ and buy gold if it dips below 1,130 and moves above 1,140.”

The Profit Radar Report identified the gold trade as one of the biggest opportunities around, and the gold rally was chugging along nicely, until the Swiss gold referendum came along.

Gold futures (chart shown) dropped more than 2% right after Sunday’s (November 30) rejection by Swiss voters. Sunday’s Profit Radar Report was published when futures were down more than 2%, trading near 1,145. It stated:

Swiss voters rejected proposals Sunday to boost gold reserves. Short-term, the Swiss gold proposal was a lose/lose proposition for gold buyers and an unnecessary cross current for our precious metals trade. As Wednesday’s PRR mentioned, soaring prices following a ‘yes’ vote were a forgone conclusion. When everyone expects a rally, the market usually doesn’t deliver one. A ‘no’ vote on the other hand would obviously be bearish.

A quick drop in gold prices was needed to shock the ‘bullish Swiss vote gold bugs.’  The question is how long of a drop? Initial (kneejerk) reactions following such newsworthy events are often wrong. Gold futures are down another 2% on Sunday.

In terms of technical analysis, the most likely interpretation of this decline is a retracement of the rally from the November 7 low. The chart shows various Fibonacci retracement levels (78.6% = 1,146.70). In terms of Elliott Wave Theory, this pullback looks like a wave 2 correction. The only requirement for a wave 2 is that it can’t exceed the prior extreme (November 7 low). In short, as long as the November 7 low remains unbroken, we are looking for higher gold prices.”

The corresponding entry level for the SPDR Gold Shares ETF (NYSEArca: GLD) was at 111.08 on November 11.

Today, gold busted through red trend line resistance. This trend line can now be used as stop-loss.

What about Gold Miners?

Gold miners tend to respond faster and stronger to rising gold prices than bullion itself. In essence, gold miners are a leveraged play on gold prices.

Friday’s kneejerk reaction offered a low-risk entry for the MarketVectors Gold Miners ETF (NYSEArca: GDX).

Sometimes when a trend line is broken, prices will double back and test the line before peeling away in the direction of the break.

The Profit Radar Report suggested a buy limit order against the green trend line to scoop up GDX in case of a pullback. That’s exactly what happened November 28, courtesy of the kneejerk selloff prior to the Swiss vote.

The actual GDX chart does not look as bullish as the gold chart, but GDX is likely to dance to gold’s beat, not vice versa.

The precious metals trade (which includes silver) is likely just in its infancy and should offer a number of good entry points along the way.

Continuous low-risk, high probability trading opportunities and gold analysis is available via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, 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. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF to get actionable ETF trade ideas delivered for free.

 

GLD Gold ETF Analysis

So you want to own gold. When is the right time to buy? Should I use gold ETFs to establish (or add to) gold positions? Here is a quick look at a simple but effective strategy to spotting good entry levels for the two biggest gold ETFs.

Are you looking to buy and own gold? Do you want to buy gold at the lowest possible price?

If so, this article is for you.

Holding physical gold, like gold coins or gold bullion, in your hand is a special feeling and comes with certain advantages. If you like physical gold, you may appreciate some of gold’s unique properties:

Gold is very pliable: A single ounce of gold can be stretched into a 5-mile long thread or beaten out into a 300-square foot shoot.

Gold is non-toxic: You may find gold metal flakes (remember it’s pliable) in exotic foods or unusual Swiss liquor. I still have a bottle of GoldSchlager schnapps in my well stocked by under utilized bar.

Gold is considered protection against financial turmoil. What kind of protection? Good question. I guess unless you were looking to buy protection against making money, owning gold in recent years has been little more than an expensive placebo (more on when to buy gold below).

Regardless, many investors want gold to be part of their investment portfolio and feel that gold ETFs are a simple and superior vehicle for owning gold.

There are a number of gold and gold-related ETFs. The two biggest gold ETFs are the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

Although IAU has a lower annual expense ratio (0.25%), GLD (with its 0.40% expense ratio) has more assets under management. Both ETFs track the price of gold well.

When to Buy Gold

As the gold chart below shows (the chart reflects actual gold prices, not gold ETF prices), gold prices can be quite volatile and buying or selling the precious yellow metal at the wrong time can cause a lot of headache (perhaps that’s where owning physical gold in the form of GoldSchlaeger schnapps helps).

In 2011 gold was caught up in an outright frenzy or bubble.

A couple of weeks before gold topped out in September 2011, I warned via the August 21 and August 24, 2011 edition of the Profit Radar Report:

“I don’t know how much higher gold will spike but I’m pretty sure it will melt down faster than its melting up. At some point investors will have to sell holdings to pay off debt or answer margin calls. The most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.”

Since the 2011 high, there have been some smaller opportunities to buy gold (green dots). All of those opportunities occurred when gold prices found support at the green trend line.

Overall though, buying gold in recent years has been a losing proposition.

I believe that an opportunity to buy gold will soon present itself.

The time to own gold will likely be when the price of gold falls to reach one of the horizontal green price support zones.

I will continue to share my thoughts and forecasts on gold prices and GLD via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

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By One Measure, Gold Miners (GDX) Are as Cheap as Ever

Gold mining is a labor and capital-intensive business. But there are times when investors can make money even in the gold mining sector. That’s either when gold prices soar or when blood is on the streets. Was the June low ‘bloody’ enough to buy gold mining stocks?

Gold mining is a tough business. It is capital intensive to wrestle the yellow metal from the ground. Once mined, gold – the most valuable asset on the company’s balance sheet – is sold.

Sometimes miners are forced to sell their gold for less than it costs to mine. The miners’ fate often depends on the price of gold.

For the novice investor, the price of gold has become unpredictable. During QE1 and QE2, gold (NYSEArca: IAU) and silver (NYSEArca: SLV) soared because investors were afraid of inflation.

During QE3 and QE4 investors were still afraid of inflation, but gold and silver tanked. Same circumstances, different outcome. Go figure. Instead the S&P 500 (SNP: ^GSPC) soared.

Most of the time the gold mining sector is not the best place if you’re looking for return of capital.

But, if you can catch a major bottom (or a gold bull market), even the gold mining sector can pay off big time.

The Market Vectors Gold Miners ETF (NYSEArca: GDX) is up 36% since its June low. Is the suffering over for the bruised mining sector?

This will largely depend on the price of gold (more below), but first let’s take a look at one unique indicator.

The chart below plots the SPDR Gold Shares (NYSEArca: GLD) against the Market Vectors Gold Miners ETF (GDX) and the GDX:GLD ratio.

The GDX:GLD ratio basically measures the price of gold stocks compared to the price of gold. When the ratio is high, miners are expensive relative to gold. When the ratio is low, miners are cheap relative to gold.

As per this measure, gold miners are cheap now and were ‘major bottom worthy’ cheap a couple of months ago.

If you go back further – until 1996, comparing the Gold Bugs Index (NYSEArca: ^HUI) with the price of gold – you will find a lower ratio in 2001, which was when HUI bottomed.

So this particular indicator suggests that a major low for gold miners is in. But what about gold prices, the lifeblood of every mining operation? The article Is The Gold Rally Real or ‘Fool’s Gold?’ takes a detailed look at gold prices.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

Has Gold Bottomed?

Gold’s second quarter will enter the history books as one of the biggest declines ever. Until yesterday, gold’s third quarter performance has been boring at best. Monday’s one day pop begs the ‘real rally or bull trap’ question.

Gold is special for many reasons. For example, a single ounce of gold can be stretched into a 5-mile long thread or beaten out into a 300-square foot sheet.

Gold is also non-toxic. In fact, you may find gold metal flakes in exotic foods or unusual Swiss liquor. I still have an old bottle of GoldSchlager schnapps in my bar.
This strong gold flake liquor may help drown the pain of this year’s gold performance, but other than that investors don’t care much about gold’s taste or pliability.
Investors buy gold as protection. What kind of protection? That’s a fair question. I guess unless you were looking to buy protection against making money, gold has been little more than an expensive placebo (ask John Paulson).
                                            
When central banks around the world started to quantitatively ease economies out of the ‘Great Recession,’ gold was considered an inflation hedge.
Quantitative easing (or QE) continues, but gold is trading 30% below its 2011 high.
This line of fundamental reasoning doesn’t make sense, but many investors still base their gold buying/selling decisions on a similar rationale.
Yesterday gold saw the biggest one-day spike of the year. Why? Perhaps you can make sense of this, I can’t.
Abe’s (Shinzo Abe, Japanese Prime Minister) party and its coalition partner won a majority of upper house seats in the weekend vote, boosting his opportunities to stimulate the economy.” – San Francisco Chronicle
Nutshell explanation: More easy money will mean higher gold prices.
If plenty of easy money over the last two years coincided with the steepest gold decline in decades, why would it propel prices higher now?
Has Gold Bottomed?
To answer the question that really counts – has gold bottomed? – I rely on technical analysis.
Technical analysis is not always correct (nothing ever is), but it got us out of gold when it traded around 1,800 and to this day I receive thank you e-mails from subscribers.
(Original August 21 and 24, 2011 subscriber update: “I don’t know how much higher gold will spike but I’m pretty sure it will melt down faster than its melting up. At some point investors will have to sell holdings to pay off debt or answer margin calls. The most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.”)
The chart below plots gold prices against the S&P 500. The resulting chart illustrates two key points:
  1. The S&P 500 and gold have been moving in the opposite direction since late 2011.
  2. The basic technical picture for gold.

Here’s what’s worth noting from a gold technical analysis point of view:
  • The June low occurred against green trend line support.
  • Monday’s bounce hoisted prices above resistance at 1,300.
  • Gold is bouncing against next resistance around 1,335.
After gold’s second quarter meltdown prices had to bounce. Until yesterday, it lacked the escape velocity needed to break above resistance (at 1,300), and still another move above 1,335 is needed to unlock higher price targets.
Since there was no bullish RSI divergence at the June low (not shown on chart), I’ve been hesitant to embrace this rally. In fact, I would prefer a new low.
But the market cares little about what I like. So, as per the July 10 Profit Radar Report, I recommended to take partial long positions in the SPDR Gold Shares (NYSEArca: GLD), or iShares Gold Trust (NYSEArca: IAU), and iShares Silver Trust (NYSEArca: SLV).
Thus far the positions have done well and we’ve locked in some profits already and increased our stop-loss to guarantee a winning trade.
Gold (and silver) will have to move higher to validate employing more capital on the long side.

Did We Miss A Major Gold Low? GLD Option Traders Were Near-Record Bearish

Has gold already bottomed? Did we miss a great buying opportunity or will there be a better one ahead? Here is a look at three indicators (along with charts) that help narrow down the next best entry point.

Following gold’s record setting decline, gold prices have rallied 10% and the (gold) dust is starting to settle. Does that mean the bottom is in for gold?

Demand For Gold Coins at Record High

The drop in gold prices was viewed as a buying opportunity by gold coin investors. The United States Mint sold a record 208,500 ounces of gold coins in April 2013 (data as of April 29). The only month investors bought more gold coins was in December 2009.

Gold prices and the SPDR Gold Shares (GLD) dipped a bit lower in January and February and soared thereafter (see chart).

GLD Option Volatility Soared at Recent Low

A few years back the CBOE launched the CBOE Gold ETF Volatility Index (GVZ). GVZ measures the market’s expectation of 30-day volatility of gold prices by applying the VIX methodology to options on SPDR Gold Shares (GLD). GVZ works like a VIX for GLD.

When the VIX soars, stocks usually find a bottom. When GVZ soars, the Gold ETF usually finds a bottom. In mid-April GVZ spiked to the highest level since gold’s 2011 meltdown.

This kind of volatility event tends to shake out a ton of ‘weak hands,’ but doesn’t always punctuate the final low. The red circles in the chart below illustrate that lasting lows frequently take the shape of a double bottom.

Up Against Resistance With Only a Minor Bullish RSI Divergence

Lasting price lows usually coincide with waning selling pressure. This creates a bullish RSI divergence (price makes a new low, RSI doesn’t). Ideally there should be a few days in between the RSI and the actual price low.

At the April 16 low for gold, there was a small RSI divergence (one day difference between price and RSI low). Such small divergences can lead to larger scale lows (one example is the March low in 30-year Treasuries), but the absence of a clearly visible RSI divergence generally results in a price relapse and double bottom.

The bar chart below shows gold prices in relation to RSI and various support/resistance levels monitored by the Profit Radar Report. Gold prices are currently pressing against triple resistance.

Sustained trade above resistance would suggest that gold is ready to rally further. Another dip to or towards new lows, however, would provide a much more attractive buying opportunity.

Did Gold’s Shake-Out Move Reveal A New Buy Signal?

How can gold prices tumble when central banks continue to devalue fiat currency while buying gold en masse?  There’s little fundamental evidence that suggested this kind of gold weakness. Technicals on the other hand projected short-term weakness.

Last week was a bumpy ride for gold prices and gold investors. There were many fundamental reasons for gold to rally:

  • Central banks continue to devalue fiat currency.
  • Central banks continue to be net buyers of gold.
  • Uncertainty caused by Cyprus-like financial escapades highlights the safe-haven appeal of gold.
  • The gold mining industry is struggling to find enough gold to meet investor demand.
  • Bullish euro gold breakout. The March 26 article “Bullish Euro Gold Breakout May Be Misleading” – published on iSPYETF.com – explained why a “shake out move” is likely to precede a bullish gold (measured in dollars) breakout.

This fundamental optimism squashed many goldbugs. Although the fundamental rationale may turn out to be correct eventually, it may be time to explore more accurate (in terms of time and price) forecasting methods.

My method of choice is plain technical analysis. Before you dismiss technical analysis as crazy chart mumbo jumbo, please review the outlook for gold published in the March 30 issue of the Profit Radar Report:

Here’s the rub on gold: We should eventually (April/May) see a good buy signal. Ideally, gold will drop below 1,554 first. Well-defined and much publicized support is around 1,520.

The media has been talking so much about support around 1,520 that we have to expect some sort of fake out move. This could be a bottom above support or stop-running with a temporary drop below support.

The bottom line is that we’ll be looking for a low-risk opportunity to go long eventually. Before we get to the buy signal, there may be an opportunity to go short.

Over the short-term, a triangle might be forming, with support around 1,596 and resistance around 1,605. A move/close below 1,596 may drive prices below 1,554.”

The April 3, Profit Radar Report added the following:

Gold followed the script outlined in Sunday’s PRR quite beautifully. Unlike price, RSI did not drop to a new low, so we’re still looking for a low-risk buying opportunity. In fact, today’s decline fulfilled the minimum requirements to start legging into gold. Aggressive gold buyers may want to buy a half or third position on the next low.”

The “next low” happened the next day. In fact, it occurred against trend channel support and resulted in quite a bounce.

Is technical analysis always spot on? No, but at the very least it acts as a safety net and prevents you from entering a foolish trade.

In many cases, such as the gold trade above, technical analysis enables you to pinpoint buy or sell levels that come with very low risk and above average potential for gains.

The Profit Radar Report combines technical analysis with sentiment analysis and seasonal patterns to identify high probability and/or low-risk trade setups.