As gold continues its bounce off the late June lows, some investors are scratching their heads. With improving economic data both in the U.S. and Europe and notably rising bond yields, shouldn’t the trajectory for gold be lower, given that it is not a big fan of economic growth?
While the simple answer might be “yes,” it is all about time frames, while not forgetting the moves in the U.S. dollar index.
First, as the U.S. Dollar Index is roughly 2.5% lower since late June, and almost 4.5% lower since its recent peak in early July, gold (all else equal) had to rally to some extent just to keep true value. Second, there is no rule that just because the medium-term trend in economic growth is up, gold can’t rally in the short-term. In fact, given all the exogenous factors playing a role in the price of gold, it is highly likely to see a counter-trend bounce at some point.
Allow me to be clear, however, that while I look at the recent rally as a bounce, I do think in the medium-term that gold — as represented by the SPDR Gold Shares (GLD) exchange-traded fund — is in a longer-lasting bottoming phase, which would imply that the recent lows could well be retested and/or undercut before the ultimate bottom is in. Please see my update on gold from Aug. 5 here.
In the Aug. 5 article, I also said that “a break above the $129 area could result in a first move toward $135″ for the GLD. Well, on Thursday, the ETF rallied past the $129 mark, which thus now puts $135 in play.
In the business of trading, it is imperative that one be able to distinguish between time frames in which price action — as well as news and trends — occurs.
This might even be more important when it comes to gold.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.