Thursday, October 17, 2013

Bottom Alert: 2 Must-See Signals in Gold

Gold is rallying nicely today. This comes after the test of the neckline of the head-and-shoulders pattern that I talked about a few days ago. It sure LOOKED like gold was going to break down. But once again, the market surprises the greatest number of people. Let me show you on a chart of the SPDR Gold Trust (GLD) ...

(Updated chart)

By this time, weary investors are saying, "it's only a dead-cat bounce." And maybe they're right. Maybe.

After all, the irony that gold plummeted during the debt crisis -- when everyone expected it to rally -- and is rallying now that the crisis is over -- can't be lost on us. 

So maybe this IS just a dead-cat bounce.  Maybe the gold bears are right.

Let me show you why I think they're wrong, and why you can start (cautiously) adding positions at this point.

And maybe why there are better metals to buy than gold.

Signal#1: Good News Is Good News

The US dollar is cratering today, plunging near eight-month lows.  This is at least part of what is fueling today's $30+ move in gold.

(Updated chart)

This is how it's supposed to work -- gold and the dollar are usually inversely correlated, because gold is priced in dollars (at least in this country. Gartman prattles on about his "owning gold in terms of yen.")

But it was just last week that gold and the dollar were moving in the same direction. While unusual, this actually went on for weeks. In that case, the fact that the dollar was down did not help gold. That's when "Good News was Bad News."

When any investment goes down on good news, that's a sure sign it wants to go lower. That's a big part of the reason why I've been bearish on gold, lately.

Now, the tables have turned. Gold is going up on good news. That's bullish.

Will the US dollar continue to go down? Well ...

  • As the Reformed Broker says, "The incoming Fed Chairperson (Janet Yellin) is the most dovish in the institution's 100 year history. There will be no taper talk whatsoever so long as employment data remains muted. At least not this quarter and probably not until the spring." More economic stimulus weighs on the dollar, because dollars have to be created in the act of stimulus. 
  • I believe the main reason the Fed won't taper is that a good chunk of one of our political parties is still taking crazy pills. Do you think we won't have ANOTHER, worse debt ceiling fight when it comes up again in February? I'd say we're headed for a kerfuffle, only this time the Tea Partiers have learned from their mistakes and will come back meaner and more determined. Anyway, short-term, that means more stimulus.
  • China's Dagong Global Credit Rating cut America's credit rating by one notch to A-minus from A on Thursday, saying a deal struck by Congress to raise the government's borrowing ceiling failed to solve the cause of its debt problem. China is pretty nervous as it is the largest foreign owner of US Treasury debt. First Fitch, now China downgrades US debt. More downgrades, if they come, could continue to kick the dollar when it is down.

A weaker dollar is bullish for gold (apparently, once again). Gold acting bullish on good news is the first step in a gold recovery.

It could get more bullish if Gold goes up on bad news. Well ...

Signal #2: Gold Rises in the Face of Continued Selling By ETFs

Exchange-traded products (ETPs) have sold 731 tons valued at $30 billion this year, data compiled by Bloomberg show.  We already know that's the major bearish force in gold.

In fact, selling by these ETFs, or ETPs as Bloomberg prefers, continued even yesterday, when gold ended the day higher. ETP assets reached 1,900.8 tons yesterday, the lowest since May 2010.

But not only did gold rise yesterday -- after starting the day in the hole -- it's up again today.

Sure, you can say that data shows selling by ETFs has slowed, so it's easier for gold prices to rise.  But isn't that in itself a bullish development?

By the way, the gold that is being sold out of the COMEX and GLD is going straight to China.

So, we have gold going up on bad news. That's bullish.

So these are two things I'm watching. Now let me show you a third thing that indicates there may be a better way to play this than gold. 

Here is the price action in gold, platinum, palladium, silver and the S&P 500 since gold's recent low in June ...

(Updated chart)

As you can see, since gold made its low in late June, it's up about 7.71%.  That's just about the same performance in the S&P 500, which is up 7.64%.

But platinum is up 9.47%.  Palladium is up 15.61%.  And silver is up 17.68%.

Silver is showing strength here.  Shouldn't you capitalize on that fact?

If I were to add any positions here, they would be half positions. Gold, silver, gold miners and silver miners still have serious overhead resistance. They could still bang their heads and head lower. There are still plenty of challenges that remain.

I believe we're at a gold bottom. But it may not be THE bottom.  

Still, if you're a risk-taker, it sure looks like the odds just shifted in your favor. I am not your investment adviser; do your own due diligence before buying anything.


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