Gold has been in a significant bear market since reaching a record high at $1,910 an ounce in 2011. In its collapse gold bullion lost $705 an ounce or 37% of its value to the recent low at $1,195. The gold mining stocks, as measured by the XAU Index of Mining stocks, crumpled even more dramatically, plunging 63% over the same period.
The consensus of the 35 technical indicators we utilize had been on a sell signal since last October 15. However, gold had become very oversold beneath key moving averages. The indicators themselves were deeply into their oversold zones. And the indicators finally improved enough to trigger a new buy signal on July 23.
My initial upside target at the buy signal was the potential resistance at the 30-week moving average (not shown), at roughly $1,475 an ounce. If it can break through that area, the next resistance is potentially in the area of $1,600.
It’s impossible to know at this point whether gold is finally in a rally that is the beginning of a new bull market, or just a bear market rally within a continuing bear market. All we can do is trust the indicators to tell us when to sell.
Supporting the buy signal is the very negative sentiment for gold. At its peak in 2011 bullish speculative positioning in the gold futures market was at a record high. For most of the way down from our October sell signal, we were called all sorts of an idiot for expecting gold to decline. Weren’t we aware that gold was in a long bull market as a safe haven, which could not help but continue given all the worsening problems in the world?
But by the time gold reached its recent low, investor sentiment was extremely bearish, speculators had pretty much liquidated their bullish bets, and short-selling of gold was rampant. Sentiment has become somewhat more bullish since gold has rallied14% off its recent low, but remains quite bearish.
The buy signal is also supported by seasonality, with August, September, and October tending to be bullish for gold. That pattern may be tied to the history of gold often moving opposite to the stock market, and the months of August, September, and October have a history of being the most negative months on average for the stock market.
Gold has been volatile during the rally so far, which is keeping skepticism regarding the rally’s sustainability at a high level, potentially bullish.
If you can handle the higher risk and volatility of the mining stocks you might want to consider the Market Vectors Gold Miners ETF, symbol GDX.
The gold stocks are much more volatile than the bullion in both directions. While gold bullion has rallied 14% off its recent low, GDX has rallied 36%.
GDX provides an instantly diversified portfolio of mining stocks. Its largest holdings are Gold Corp (GG), Barrick Gold (ABX), Newmont Mining (NEM), Silver Wheaton (SLW), Anglogold (AU), and Kinross Gold (KGC).
But be aware of the sometimes heart-stopping volatility in GDX. It has been up and back down as much as 5 and 6% on numerous days. And with the current short-term extended condition above its 30-day m.a. that volatility is likely to continue.
In the interest of full disclosure, I and my subscribers have had positions in the SPDR Gold Trust etf, symbol GLD, and in the Market Vectors Gold Miners ETF, symbol GDX, since our July 28 buy signal.
Sy is president of StreetSmartReport.com and editor of the free market blogStreet Smart Post. Follow him on twitter @streetsmartpost. He was the Timer Digest #1 Gold Timer for 2012 (Gold Timer of the Year), as well as the #2 Long-Term Stock Market Timer.
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chow@royalindexuae.com
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