Gold futures made a top extension at a daily scale on Friday, as shown in the first chart. The second is to point out that there is a longer-term downtrend:
Fear about various developments in the world (including a bear market in stocks) has pushed gold up by a bit more than 10% since the beginning of the year, which is a tepid response from the world’s favourite ‘flight asset’. Sell some.
It is popularly supposed that gold and the $ are inversely correlated, so that gold acts as a kind of ‘anti-$’. If this were true we would be perverse in recommending a short gold position at the same time as being short the $, so here is an examination of the relationship between the two. The top chart of these next three is the $ price of gold displayed as a monthly bar. Underneath it is the trade-weighted $ index. There is little to connect the two except a brief period from mid 2008 to mid 2011 when they went in opposite directions (but only when the gold price rose). This point is emphasised by the last chart in which shows the gold price in the currencies that are used to calculate the $ index – the price divided by the $ index. Gold peaked and troughed at broadly the same moments once the $ was removed from the price:
As we occasionally point out, top extensions usually mark the start of a process of market reversal from up to down, so it may be better to ‘stalk’ the gold market for a little while, trying to sell small further rallies as the short-term trend shifts from upwards to sideways or down. As the second of the top charts and these monthlies all sh0w, there is a clear shallow down trend that has been in place for several years, so this short-sale fits well with that overall picture – don’t wait too long to sell short. As an alternative, you may choose to sell platinum instead.
We will write on stocks in the next 24 -36 hours as there is a turn due on Monday 8th. If prices remain weak through that day (or make a decent new low for the move at any time during the day) then this will be some evidence that the turn marks a low point. If there is further evidence then we may issue a ‘buy’ recommendation. This is not it however as we need to see what happens during the trading day. Until then we remain bearish.
