Don't Over-Analyze Gold, Just Follow the Charts

As we have mentioned here several times, gold - and for many investors, that typically means the GLD, the ETF that tracks the underlying price of gold - has threatened to break out of its longstanding consolidation. We have outlined the 97-98 range as being key resistance. Previous attempts to break above this level have fizzled, but volume on the most recent two-day stretch is worth noting. The chart:

Note that alongside the increase in volume on this move, relative strength indicators have also perked up. The "buzz" currently centers around gold correlating to the decline in the U.S. Dollar, however looking at the chart of UUP - the ETF that tracks the bullish movement of the dollar - the dollar has yet to break down below its most recent lows.

Over-analyzing the movement, cause/effect of any commodity can be tricky. Those already interested in diversifying into gold should watch for dips and technical break-outs to time their entries, and try their best to filter out the "noise." Many commodities operate under very longstanding trends, making day-to-day speculation on their movements largely pointless. In this case, the charts indicate that gold is moving in advance of any further breakdown in the dollar, and as such it may not be prudent to wait for confirmation there before playing any break-out in gold.

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

Comments

[justin_3d:]

Good Stuff! I being waiting for a great opportunity to buy some gold, but it has just been too strong and has not broken down. From these levels it should have not problem breaking the 1000!

Sep 04 10:35 AM

[The Recusant:]

I'm surprised that the author listens to "buzz" about the gold/dollar correlation but has missed the "buzz" about GLD as a poor investment due to its lack of hard assets and its derivatives base. Nor do they allow investor or independent audits of their gold. Why invest in a popular but suspect stock? A better bet would be to buy gold bullion or invest in a legit gold holder like GTU, CEF, or mines or one of the miner EFTs.

Sep 04 12:51 PM

[Old Trader:]

I have to agree with The Recusant. I've been fortunate in making some money trading in the miners, GFI and GG, specifically, as they've been trading in a sideways channel for a few months, which might be breaking out on the upside, if gold continues upwards.

Sep 04 09:39 PM

[Jake2:]

Nice piece: short and sweet, with stats to support thesis.

Sep 07 02:19 AM

[Brian Kyser:]

Thanks for the comments. Many ways to play the break-out, I agree. Mad Hedge brings up some excellent points. Any ETF play on this move should be viewed as a trade solely, in my opinion, and dependng on the savvy of the investor/trader, mining stocks or gold coins could be the better choice.

Sep 08 09:38 AM