Is Gold Ready to Breakout?
With gold closing over $1000/ounce on Friday and with all of the panic talk about nationalization of banks,
Gold seems ready to explode higher. Is it really?
Below are a couple of charts that should serve to give the gold bulls pause at least over the short term. Before I present these charts, I would like to say that I believe that gold will explode higher once a true crisis in confidence develops regarding world currencies. For now, though, I urge caution for active traders looking to pile in at this point.
First, let’s take a look at a weekly chart of GLD (the SPDR Gold Shares ETF). Notice how GLD made its
high in March of 2008, then pulled back to its October 2008 low. From there it has rallied back to its previous high and now looks ready to make an attempt to push through.
Now let’s have a look at another weekly chart. This chart shows the spread between the Gold Bugs Index
(HUI) which is an index of mining stocks, as compared to the physical price of gold (GLD). The HUI:GLD
spread typically leads or coincides with movements in physical gold. When the HUI:GLD spread is moving higher, gold mining stocks are outperforming gold When the spread is moving lower, physical gold is outperforming gold mining stocks. Outperformance by gold mining stocks (a rising spread line) tends to validate or confirm moves in physical gold.
Notice in the chart below that the HUI:GLD spread made a low in May 2005 just like GLD. It also broke out to new highs in September 2007 and topped in March 2008. The curious element now, though, is that the HUI:GLD spread is nowhere near its March 2008 high. This serves as a screaming invalidation of gold’s recent surge.
One caveat here is that in these uncertain economic times, some inter-market relationships have become
dormant. This is one relationship that has stood the test of time, however, so we will continue to heed its
warning and tread lightly when looking to add new positions.
Recommendation: Buy and holders continue to hold. Higher prices are ahead with near term turbulence
expected. More active traders would be wise to wait for a pullback before looking for entry. As of now, a
case can be made for a GLD pullback to the 88 – 91 area.
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