Gold’s in an Uptrend, but for How Long?

On the 18th of April, I wrote to you in Money Morning about the huge sell-off in gold. I said that:

A collapse like the one we’ve seen will bring a lot of latent demand to the fore. In fact my expectations are that we’ll see a vicious bounce in the gold price, sooner rather than later.

I think it’s a bit like jumping on an inflated ball in the pool.  The further you push it down the quicker it will whip back in your face.

Fast forward two weeks and the gold price has bounced over US$150 from the intraday lows near US$1,320. That’s a 10% bounce in the price of gold in a couple of weeks.

The latent demand that I was talking about did come out of the woodwork and there was plenty of anecdotal evidence from dealers that physical gold demand went through the roof. The Perth Mint has even been staying open over the weekend to refine gold in order to fill a huge backlog of orders.

If you bought when I suggested a couple of weeks ago then now would be a good time to take a bit of money off the table here, because there is nothing saying that gold is completely out of trouble yet…

The next hurdle for gold to overcome is the US$1,530–1,550 area where gold initially broke down from in April.  A major support level will often become stiff resistance once it is broken so I could imagine gold will have a tough time getting above that level in the short term.

Gold Price Daily Chart

Click to enlarge
If we step back and look at the price action purely from a technical perspective we can see that gold is in short term uptrend, but intermediate (10 day moving average below the 35 day moving average) and long term downtrend (35 day moving average below the 200 day moving average).

Don’t Discount this Possibility

It’s very aggressive to be getting overly bullish just because the short term trend is now up.  If the short term trend shifts back down (i.e. the price is below the 10 day exponential moving average according to my rules) then all trends will be pointing down and you could expect to see lower prices in the short term.

If I had to hazard a guess where I thought gold could go from here I would say that we could see a continued rally to the overhead resistance at US$1,530–1,550 which then stalls and leads to another bout of selling pressure.  How far gold falls on the next leg down is anyone’s guess of course but we can’t discount the possibility that it could fall all the way back to the recent lows of US$1,320.

If we saw a false break of the lows down there then you would definitely be backing up the truck and buying all the physical gold you could get your hands on.

I’m not sure we’ll be lucky enough to see that occur but you never know.  It’s more likely that any sell-off from the major resistance will fall far enough to shake out any traders who entered gold too late in this rally, but not far enough to give a clear buy signal.

The time to start getting bullish gold for the longer term will be when the intermediate trend shifts back up and the weekly MACD indicator turns bullish.  Until then you need to be pretty nimble if you’re buying gold and be sure to take some profits off the table at regular intervals.

I do quite like the look of the Australian Gold ETF [ASX: GOLD].  You’re effectively short the Aussie dollar and long gold via this ETF and I think that could be a great position to have on going forward.

Analysing the Aussie Dollar

The Australian dollar has been showing some signs of weakness in the last few weeks.  It is still early days of course and the flood of money coming in from offshore is showing no real signs of letting up, but the Aussie dollar is overvalued on most measures and I think it is only a matter of time until the Aussie ends up reuniting with our weak terms of trade.

I also believe that a lot of the money that has found its way into our bonds is relatively hot in that it will look for the exits if the currency starts to nose dive.  Who wants to make 3% a year on their bonds and lose 20% on the currency?

If that is the case then the very thing that has been helping to keep the Australian dollar afloat could become the fuel to ignite a sharp fall.

Aussie Dollar Daily Price Chart

Click to enlarge
I looked at the Australian dollar last week, so wade through your past emails if you want to have a more detailed view of the Aussie.  The main point I want to make today is that the Aussie is still stuck in a range so it is too early to make any big sweeping statements about what comes next, but the last line of support near US$1.015 is important to keep your eyes on.

If that support level gives way then there is not much support below it.  You could see the Aussie diving towards US$0.98–1.00 pretty quickly.  There is some very major support around parity, and I would expect it to hold for the foreseeable future, but if the 2008 high around US$0.985 can’t hold we could witness a swan dive in the Aussie dollar towards the low 90’s.

A move like that is obviously the outlier at the moment with the continued buying from offshore money hunting yield, but the charts are showing that outcome as a distinct possibility going forward.

So all up the Aussie dollar gold price could be well supported going forward.  Keeping an eye on those trends in gold and waiting for the right time to strike could lead to a great long term buying opportunity.

Murray Dawes
Editor, Slipstream Trader

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Ed Note: One of the oldest sayings among stock market traders is ‘the trend is your friend’. That’s true a lot of the time, but not all the time. In fact, a key part of Murray’s analysis is identifying when the trend isn’t your friend. In today’s Money Morning Premium, Kris reveals the key metric that has influenced his big call for the market in 2013. Click here to upgrade now.

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Murray Dawes is the Editor of Pivot Trader and contributing Editor at Money Morning. He was one of five, from 5,000 applicants, chosen for a graduate position with the Swiss Banking Corporation — now part of banking giant UBS. The bosses quickly cottoned on to his potential and pushed him up the ranks as a futures broker on the floors of the Sydney Futures Exchange. Murray later broke out on his own, and developed custom trading systems to trade leveraged financial instruments like futures. Due to his success, Murray became the ‘hired gun’ trader for Australia’s rich and famous. Today, Murray runs a trading service through Port Phillip Publishing to help everyday Aussie investors use his advanced trading methods.

One response to “Gold’s in an Uptrend, but for How Long?

  1. Well, Murray you must be sick to death of the gold story by now?

    Real interesting story is the ASX, when is it time to go short?

    My assessment is still too early to go short.

    When the time is right, I will make a call on this market.

    Banks will be a very good short.

    Was I just lucky on my bear call in March/April 2011 for resources?

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