Gold Unaffected by the Economic Crisis?

I am no gold bug. I am not one of the fanatical core, the priesthood, a worshiper of the shiny metal. I have, however, recommended it from time to time, and believe it to be an excellent core component of a balanced portfolio. And as such, I take a gander at it, fairly frequently. Not the actual metal itself - that would make me strange. But rather the stock chart of the GLD, the ETF that tracks the price of gold bullion.

Gold hasn't done much over the past several months, aside from chop around in a sloppy range. There has been a lot of swapping in and out of gold by flighty traders, used as a hedge against fears of future inflation, bought and sold by institutions, and as of late, exited in favor of material possession of the shiny metal itself by some hedge funds (those who pay attention to the paper-to-metal arbitrage).

But irrespective of this continued, underlying jostling of positions, one thing is certain - the price of gold has largely been unaffected, for good or bad, by the economic crisis, and consequently by the most recent "flight from safety" rally.

So what gives? The dollar has been getting crushed, emerging markets assets have surged. The best emerging markets movers have been consumer-related, anticipating the effectiveness of these countries recovery efforts. Gold has been unimpressed by the decline of the dollar, and at the same time unaffected by the move away from safe haven assets. It is nearly the same price now as it was to start 2008. Who would have guessed?

With the markets at overbought levels, it may be worth keeping an eye on GLD here. Obviously many investors have core positions in gold. And buying the GLD for a trade while it is still muddled within the parameters of its range is probably unnecessarily risky.

However, taking a step back and eying the GLD from a longer-term time frame certainly lends one the confidence that this range should eventually be resolved to the upside, and potentially in dramatic fashion. Longstanding consolidations often beget powerful moves.

In the chart above, one can see the short-term resistance around 95-96, and the top-line resistance at 100. A move above 95 might be enough to warrant putting some buy stops in place or even some preemptive trades (with stops below).

Certainly so far no external catalyst or leading indicator has assisted investors or traders in timing additional entries into gold. Anticipating range break-outs has proven futile so far.

However, one interesting technical development of late might help provide a catalyst, and that is the euro. While the dollar has declined precipitously, the euro has been working on a flag consolidation . A break-out in the euro might provide some oomph in gold's chances for a range break-out of its own.

Take a look at a recent chart of the euro:

Now, the correlation between gold and the euro isn't a surefire thing. It used to be a fair correlation, but many pundits put the ratio at about 65% nowadays. European banks for many years have felt that they have held too much physical gold and have been selling their stockpiles, putting a lid on what could have otherwise been a fairly parabolic market (given world events).

Nonetheless, advents such as the creation of gold- and silver-based ETFs as well as improved investor and consumer demand has largely helped to soak up these institutional sales. The GLD ETF is now one of the largest holders of gold out there, having increased dramatically in recent years.

And yet, given the economic crisis, European central banks have reputedly slowed their sales, creating a floor under prices, and perhaps provided the juice for a resumption of the euro-gold correlation in the future. There is sometimes a lag of some kind between these trading instruments, and therefore a break-out move in the euro might lead a follow-on move in GLD, and therefore the euro is worth watching closely as the dollar continues to fall.

Should this scenario not develop, investors could patiently wait for a move back towards support (around 80/800) for an entry, but a successful break-out attempt should be worthwhile to trade, given that an expansion from a range of this size could be fairly large in scope.

Disclaimer: The author's clients maintain positions in GLD.

Comments

[gold33vain:]

Watching buying GLD/SLV are not a reflection of the REAL gold/silver market. Yes, they are tied by price, however, comparing PAPER investments (GLD/SLV) and PHYSICAL holding are like comparing Ford and Rolls Royce.

The market is not ignoring bad news, the price is being MANIPULATED.

Aug 02 06:57 PM

[bobsmith5:]

"I take a gander at it, fairly frequently. Not the actual metal itself - that would make me strange."

So, taking a gander at the underlying asset that gives value to the paper substitute would make you strange?
I think this proves you ARE strange!!

Aug 03 01:39 PM

[Brian Kyser:]

Actually the comment refers to the process of sitting in a chair uselessly staring at a piece of gold. Looking at the actual spot value of gold is obviously important. This was an attempt at humor and obviously not clear enough.


On Aug 03 01:39 PM bobsmith5 wrote:

> "I take a gander at it, fairly frequently. Not the actual metal itself
> - that would make me strange."
>
> So, taking a gander at the underlying asset that gives value to the
> paper substitute would make you strange?
> I think this proves you ARE strange!!

Aug 03 02:01 PM