“Gold is strong,” I hear you ask, “are you crazy?” Yes, gold fell just below $1150, but in relative terms I think it performed OK over the past 24 hours. The chart below compares gold to some key currencies with the red dot corresponding to 3am US/8am Europe.
Prior to Tuesday gold was following the performance of the currencies listed in the chart. As money ran to the (lets say “perceived”) safety of US dollar you can see the dollar strengthen as indicated by the black line. At the same time the other currencies were sold heavily but note that gold held its ground for a couple of hours, sold off a bit at 6am, held for a few more hours, then crashed just before 9am. It look to me like gold was attracting buying but eventually that was not enough to counter the selling pressure from the professional money (an others) I discussed yesterday.
Having said that, gold did not recover later in the trading day as most of the other currencies did, ending much worse off. However, if we look at the same time period but compare gold to the other precious metals and oil, the picture isn’t as bad (see below).
Again, gold held up while platinum and palladium sold off, and come 9am silver and oil crashed much more than gold. Gold ended this 24 hour period the best performer.
The question here is will gold be able to hold above $1150, or indeed, has it bottomed? With professional market sentiment negative towards gold and Chinese demand weak (more about that tomorrow), there is risk of further downside. If gold can hold, it doesn’t mean it will rally as gold can trend sideways for many years, as it did in the mid 1990s for example (see below).
You often won’t see such predictions made because they are boring, so analysts and commentators usually forecast increases or decreases. While such basing phases can be frustrating, as Justin at Next Big Trade notes,
“each failed attempt disheartens the bulls and continues to plunge more and more investors into giving up which eventually is what causes a super buying opportunity when the real Stage 2 breakout finally materializes. This is why the “bigger the base”, the higher the potential for a big trade because the bulls have been washed out of the investment.”
However, before you go out and load up, consider Steve Sjuggerud’s advice that an ideal investment has to have three characteristics:
1. It’s cheap (value)
2. It’s hated
3. And it’s in an uptrend (momentum)
Gold certainly has the first two covered but we haven’t seen a sustained upward trend yet, which is why Steve is holding off on investing in commodities that he sees exhibiting a similar set up to gold. They say they don’t ring a bell at the bottom, but if gold can hold $1150 then maybe it is time to brush up on your campanology.