Gold’s Not Quite Ready to Short Yet, But …

by James Brumley | March 20, 2013 11:26 am

Are you looking to get short on gold after the recent bounce because you think the longer-term downtrend is still intact?

I can’t say I blame you — I’m a gold bear myself — but I don’t know that I’d be taking on bearish gold positions just yet. I do know where I would start to mull entering a new bet against gold, however, and it’s not too far from where we are now.

Just for Perspective

To give credit where it’s due, the bulls held the line where and when they needed to most following the February plunge in gold prices.

The $1,556-per-ounce mark was and still is a major support level that extends all the way back to September 2011, and though the sellers tested that line last month, they didn’t cross it. (There’s another big floor at $1,530 that wasn’t even tested at all.) In fact, the support at $1,556 ended up being a pushoff point for the current rally. The question is, how much more upside is left to unfurl now that gold’s floor held up? Answer: About another 4.2%, or roughly $70 per ounce. That would put gold prices back somewhere in the vicinity of $1,680.

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That’s not a number I randomly pulled out of a hat. That’s near a couple of key technical resistance lines that, like it or not, do matter.

The first ceiling is the key 200-day moving average line, which currently is at $1,670. As you can see on the nearby chart, although not every major top or bottom for gold has formed at the 200-day line, too many have to dismiss it as a resistance level now.

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The other big ceiling that could cap this rally effort is the Fibonacci retracement level around $1,692. That’s a 38.2% retracement of the big pullback from 2011’s peak of $1,944 to 2012’s low of $1,537. It might seem a bit arbitrary, but Fibonacci lines do a surprisingly good job at figuring out the market’s natural “uncle” points. We shouldn’t dismiss their effect.

Between the Fib line and the 200-day line, there’s plenty that could get in the way around the $1,680 mark. Thing is, there’s not a lot that could stop the rally between here and there.

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Oh, and if you’re not a futures trader or prefer something more conventional like an ETF, then the technical ceiling for the SPDR Gold Shares (NYSE:GLD[1]) ETF is around $162, where its 38.2% Fibonacci retracement line and 200-day MA are close to intersecting.

All that being said, though the technical look might seem like a short-term one, this is ultimately part of a long-term look at gold’s changing fundamentals. And those long-term fundamentals still are leaning bearishly.

But Why?

When it’s all said and done, gold prices are mostly driven by the U.S. dollar. If the U.S. dollar’s value rises, gold slumps. If the U.S. dollar slumps, gold prices rise. There are other factors that push and pull gold prices (like inflation, and consumption), but by and large, gold is driven by the greenback.

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Care to guess what has not been falling the last couple of weeks even though gold’s been on the rise? If you said the U.S. dollar, you’re right.

The U.S. dollar index actually is higher now than it was a couple of weeks ago, and is close to new multimonth highs. For all intents and purposes, this is backward.

One could argue that gold actually is leading the dollar, meaning sooner or later, the U.S. dollar index will fall to reflect the rise in gold’s prices. That’s a very stretched assumption, however, mostly because that’s rarely the way it happens.

And yes, the dollar is more likely to keep rising than to fall again.

The so-called currency war that began about a month ago is ultimately designed to make other currencies weak, which makes the U.S. dollar relatively stronger. At the same time, there’s nothing in the United States’ current fiscal policy that’s likely to put downward pressure on the dollar’s value anytime soon. Translation: There’s nothing the Fed could plausibly do from here that would actually push the U.S. dollar index lower again, especially given how intent other nations — especially in eastern Asia — are on keeping their export business strong by keeping their currency weak.

Bottom line: Gold is in a long-term downtrend, but you still want to pick and choose your spots.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. GLD:

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