Friday Quiz: Is Gold Set to Rise or Fall?   (February 27, 2009)

Answer: nobody knows. But there are technical reasons to expect a pullback within a long-term uptrend. Risk management suggests caution at the moment.

What with all the buzz about gold touching $1,000/ounce again (when priced in dollars), I asked frequent contributor Harun I. for some charts and commentary on the yellow metal.

Harun was kind enough to share some charts on oil yesterday, Oil Market Update (February 26, 2009) and recently he shared the possibility that the general market might well be setting up for a Bear Market rally: Forgotten Indicators: Is the Stock Market About to Turn Up? (February 5, 2009)

Chart 1.
Long term, Gold is still in an uptrend. The 2008 annual high is being tested and January's highs were unambiguously taken out. October was the 4th quarter 2008 low. It was important that October's strong down bar was not confirmed by follow through. As the upper band comes under pressure this rally may stall. MACD is divergent with the major histogram (red) coming up against signal line resistance. Price at the upper and without confirmation from MACD usually leads to a correction.

Chart 2.
Commitment of Trader data suggests that net-percent open interest of Commercial and Large traders has reached a level which has shown to facilitate sustained rallies. Overall open interest is increasing at a significant rate-of-change -- another indication of sustainable activity. The intermediate level bollinger bands are expanding indicating good volatility on the breakout at this level of trend.

Chart 3.
Daily chart with 200-day Bollinger bands and RSI indicate that price is at a relative high and overbought. The earlier divergence noted in RSI went unconfirmed. This is why it is usually a good idea to wait for price to confirm. More aggressive traders may have tested the market on the basis of the divergence. However one trades, the important thing is risk management. The 200-day mean is turning up. History shows that after the upper or lower band is achieved with an RSI overbought/oversold reading a correction has occurred.

Gold may have completed its correction but timing is everything. From a purely educational perspective entry now may not be advantageous based on the risk/reward scenario. March may see a correction that sets up a challenge of the highs for the second quarter.

Thank you, Harun. Gold has a knack for becoming overloved, and then it's time to be careful. As a naive rube I learned this the hard way back in 2004 when $500 was the "guaranteed target"... alas it promptly dropped to $450.

Yes, it's a wonderful store of purchasing power and yes, it's in a long-term uptrend, and yes, I own it and ABX, but that doesn't negate the notion that buying on the dips rather than at the tops is a worthy money-management goal.

As usual, this is not investment advice, just a free opinion by an amateur; please read the HUGE GIANT BIG FAT DISCLAIMER below.

Books of interest mentioned this week:

The Fall of the Roman Empire

Collapse: How Societies Choose to Fail or Succeed

The Collapse of Complex Societies

Fruitless Fall: The Collapse of the Honey Bee and the Coming Agricultural Crisis

The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel

Reinventing Collapse: The Soviet Example and American Prospects

Shameless pitch for my own book: Weblogs & New Media: Marketing in Crisis

Of Two Minds reader forum (hosted offsite, reader moderated)

New Operation SERF Installment:

Operation SERF, Part 10

Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

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