Before you follow the herd into gold and silver, you need to understand the patterns and trend forming in the precious metals sector. To do this, I look at multiple time frames, as well as the gold mining stocks. Gold stocks tend to lead the price of gold bullion, and when they are outperforming the price of gold by 10% or more you should expect a temporary pause or pullback in both gold stocks and gold bullion prices.
Let’s take a look at the short- and long-term trends for gold.
Gold Bullion Weekly Trend Chart
Gold is currently in a strong uptrend. The occasional test of support at the major moving averages can provide great long-term points for adding to a position. The 50-day moving average is one that is tested frequently.
Looking at the weekly chart, I see a red flag for the intermediate price of gold. While the trend is clearly up, I can’t help but notice the rising wedge, which is a bearish chart pattern. During an uptrend, we want to see bull flags and pennants, not a grind higher forming a narrowing range. This grind higher could unfold in a way similar to the price action of 2005 and 2007 instead of a correction, but I doubt it. I think we will see a sharp correction because more people are bullish on gold now than were during the June top.
For those looking at gold as a long-term investment/currency, be patient and wait for a pullback to a major moving average before adding to your position.
SPDR Gold Trust (GLD) Daily Chart
The SPDR Gold Trust (NYSE: GLD) mirrors the spot gold price. As you can see below, the price of gold is trading at resistance and becoming choppy. Buying gold at resistance does not make sense. There is a very good chance gold will move lower in the coming weeks, providing a better price for long-term investors to add to their positions. For example, if you waited for the weekly chart to pull back to the 50-day moving average, that would be like buying GLD at $113, which is an 8% discount to the current price.
Gold continues to hold up within its channel, but this week we could see fireworks if the price breaks below the blue support channels.
Gold vs. Gold Stocks – Daily Chart
This chart shows the performance of gold versus gold stocks from the February 2010 lows. The blue line is the performance of gold stocks, while the red line shows gold’s performance. It’s obvious that when everyone is bullish on gold they buy the highly leveraged gold investments in order to take full advantage of the upcoming move. This is much like reading the put/call ratio for trading the S&P 500, and it measures the bullishness of the precious metals sector.
When gold equities are strongly outperforming gold bullion, you should be thinking about raising your stops, taking partial profits and/or hedging your long-term position until the sector stabilizes and is not trading at a premium.
In short, gold is in a strong uptrend and will remain in one for a long time. Commodities do have a higher percentage of going parabolic. That means there’s a small chance that gold will continue to move up quicker and quicker, surging hundreds of dollars in a very short period of time. That being said, it’s not very likely, and from a technical point of view, those buying gold now are paying a premium.
You can get my detailed analysis and trades for oil, the U.S. dollar, Treasury notes, the broad market and sectors by joining my ETF Trading Service.
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