Gold Has Resumed Its Glitter

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 |  Includes: GDX, GLD
by: Sy Harding

Gold has been almost as volatile as the stock market since August. After becoming overheated in July and early August, it plunged $340 an ounce to its low of $1,592 in late September. In one brief period in September it collapsed $214 an ounce in just four days.

Not surprisingly that cooled off the excitement and euphoria of the previous two months. The sudden plunge pushed the popular expectation that gold would reach $2,000 and $2,500 an ounce within weeks into the background. It had investors paying more attention to George Soros’ assessment of last spring that gold was in a bubble that would end badly. And it was enough to have investor sentiment for gold became quite bearish.

However, much of gold’s problem in August and September seems to have been the result not only of its overbought condition, but of the CME Group raising its margin requirements for holding gold contracts, by 22% in August, and another 21% in September. The higher margin requirements forced traders to either come up with more cash to hold their positions or cut back on holdings.

Once that pressure was off gold began to rally again.

Meanwhile, on the intermediate-term charts all gold had done was become overbought above its 30-week m.a. average in the July/August excitement, and pull back to retest the potential support at its 30-week m.a. again. That retest is looking increasingly successful.

What I’m liking about gold in addition to its positive appearance technically on the charts is that with the previous euphoric excitement for gold cooled off, it should have room to run to new highs before investors and the media get caught up in it and become overly excited again.

Meanwhile, the return of uncertainties in Europe has had money flowing out of the euro and into the U.S. dollar, driving the dollar higher. If the uncertainties in Greece and Italy are now going to move into the background again, as seems likely with the developments of the last few days, that flow is liable to reverse, out of the dollar and into the beaten down euro. Since gold tends to move opposite to the dollar, a turn back to the downside by the dollar again would be another potential positive for gold.

In the interest of full disclosure, my subscribers and I have positions in gold bullion via the SPDR Gold ETF symbol GLD.

Gold stocks are also beginning to look attractive for a change. While gold bullion is already up 21% for the year to date, the XAU Index of mining stocks is down close to 10% for the year. Their problem is that they have more or less been trading with the rest of the stock market rather than with the underlying bullion.

While the mining stocks may continue to trade more under the influence of the stock market than the bullion, the stock market is now in its favorable season. The combination of a rising stock market and resumption of the rally in gold bullion may have the mining stocks coming out of their doldrums soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.