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Sector Spotlight:Why is Gold not Shining?

In our June 11th InTrust blog entry "Is Gold a Buy?",  we outlined the technical reasons for a pullback in gold.  Well how has gold fared since then?

The continuous contract for Gold (symbol $GOLD) closed the day on June 11th at $1226.30 an ounce.  The July 19th close is now at $1184.00 an ounce... a decline of 3.45% since our post.

In our post we outlined that the monthly chart of $GOLD was at the top of its trading channel and would likely trade down from there to either the middle or bottom of the channel.  

 As you can see below, $GOLD has just begun to move down.  The monthly chart still has a serious divergence between price, which went to new highs, and its Relative Strength  Indicator, which failed to confirm the new highs.

What is funny is the economic outlook always seems to meet hand in hand with the technical picture.  According market watchers at Jefferies Equity derivatives desk, "it might be growing increasingly tough to justify gold amid worries about persistent disinflation...and even the possibilities of outright deflation" (source WSJ.com).  

We would also argue that the other reason is the apparent "eye of the storm" for the European sovereign debt markets.  Yes, Hungary was in the news over the weekend, but it's not really one of the targeted PIIGS that the market is closely following.    The monthly chart, above, would argue against any further sovereign debt scares to the market until $Gold pulls back to at least its 18 month moving average.  This would put the next crisis at late fall or possibly early 2012.

However, this scare could even be pushed further into the future if $GOLD pulls back to its lower upward channel line as we believe is possible.  Our longer-term indicators show this to be a real possibility.  If this happens, the likely cause of this pullback will turn out to be a double dip recession for the economy.



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