Don't Buy The Gold Dead Cat Bounce
Portfolio Strategy, Gold
Seeking Alpha Analyst Since 2013
I recently wrote an article on why I don't own gold, and this recent bounce in gold has done absolutely nothing to change the reasoning. The main pillar of support for gold is the belief that QEfinity will result in inflation. The problem is, gold peaked 2 years ago over $1,900 and has fallen ever since. Each round of QE has resulted in lower and lower gold prices, not higher gold prices. Inflation expectations haven't increased, they have decreased. Almost the entire basis for high gold prices is based upon expectations that are in complete contradiction with the actual data being generated by the economy. Because of this the markets have been using any rally in gold as an opportunity to exit their positions, not add to them. It simply is hard to create a scenario where you have more fear and more money printing than in the past. If that is the case, what could possibly drive gold to a new high? 2008 is in the past and the fear is turning to optimism, and QEfinity is changing to QEfinite. Gold had a great decade long run, but all good thing must end, as all bubbles do.
The gold bulls still however want to make their case, but their case is becoming weaker and weaker with every effort. Take this Forbes artical as an example. The bullish title almost me want to rush out and buy gold, but then I looked as what data backed such bullishness, and it was at best grasping as straws.
Technical Trading: Gold Blasts Above Key $1,300 Level, Scoring Important Upside Breakout
The first warning sign was that it was written by contributor "Kitco News." Kitco is a major retailer and data provider for precious metals, with a strong financial interest in keeping the gold rally alive and kicking. I doubt you will ever see Kitco writing bearish articles about gold...it would be bad for business.
Supporting the bullish headline was this evidence, highlighted in a graph.
The entire bullish case is based upon:
1) Gold breaking above $1,300
2) Gold looks to have completed a short-term reversal pattern
That is it, that is all it takes to get an article published in Forbes that is bullish about gold. Maybe Forbes should scan Seeking Alpha for some analysts that might take a bit more pride in their work.
Looking at the chart provided, it actually makes a far more bearish than bullish case for gold. I took the same chart and added some trendlines.
The first thing to note is that yes, it does look like gold broke out on the upside of a reversal pattern, but it immediately ran into resistance of an intermediate-term down trend. The gold rally looks to have ended before it began. The down trendline sits around $1,335, so gold may have another $10 on the upside before reality sets in, and the gold returns to its fall. Even if gold breaks through $1,335, the major resistance sits up around $1,420 as the graphic identifies as 'congestive resistance," and then again around $1,450 to $1,480 where it would run into the longer term downtrend line. Worse yet, Kitco's own "customized 9-day relative strength index" is nearing "overbought," and is nearing a level rarely seen, and all previous times shown resulted in a sharp sell off in gold. Bottom line, from the graph provide to make a bullish case, I would say the path of least resistance for gold is down not up.
In conclusion; buying gold/SPDR Gold Trust (GLD) and silver/iShares Silver Trust (SLV) now is like trying to catch the proverbially falling knife. It is more gambling than investment. Because gold doesn't pay an income and is priced based upon the "greater fool theory," it is difficult to create an investment model to explain it. Even Ben Bernanke admits he doesn't understand how gold is priced.
"No one really understands gold prices," Bernanke told the Senate Banking Committee, adding he doesn't get it either.
Because of this, technical analysis is the preferred method of gold analysis, and at least according to the technical evidence provided by the graphic, the technical indicators appear to be signaling gold should go lower, not higher once this dead cat bounce ends.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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