GOLD BUGS, RELAX ! IT´S JUST A CORRECTION / BARRON´S MAGAZINE GETTING TECHNICAL ( VERY HIGHLY RECOMMENDED READING )

Getting Technical

MONDAY, SEPTEMBER 26, 2011

Gold Bugs, Relax! It's Just a Correction

By MICHAEL KAHN

The technicals suggest that the recent drop in the yellow metal is a speed bump in a long-term bull market.

Despite falling 20% off its Sept. 6 intraday peak of $1924 an ounce, the technicals for gold remain solid.


And that means gold is on sale. It is time to start nibbling again.


Most investors are familiar with stock market analysts saying that stocks are on sale when they suffer a big price decline without much change in their fundamentals. Theoretically, if you liked a stock at a price of $30, for example, you should really like it at $25.


Unfortunately, in many of these situations the technicals have deteriorated to a point where cheap will get even cheaper.
The same cannot be said about gold. The long-term trend is gold is still very much intact and the correction has not broken any major long-term supports.


In Monday's trading, the SPDR Gold Trust (ticker: GLD) touched the rising long-term trendline drawn from the November 2008 low (see Chart 1). To a chart watcher, this is an important event as it shows the market reverting back to a more sustainable rate of change.
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Chart 1

GOLD ETF

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The last time the market touched the trendline was on July 1, just before global-stock markets plunged. The resulting influx of money to the perceived safety of gold sent the metal up sharply in an ever-increasing pace. As I wrote here in August, the rally had "gone parabolic" to suggest a big markdown was near (see Getting Technical, "Irrational Ebullience for Bullion?" August 22).


But there is an interesting phenomenon that sometimes follows parabolic increases. After prices peak, they often come down in an equally frenzied rate to give back almost all of the parabolic gains. The decline seen over the past few trading days certainly qualifies in that regard.

Silver had a scarier tumble. For the second time since April, silver collapsed, this time by 35%, measured from its September 21 close through its overnight low Monday of 26.15.


But the iShares Silver Trust (SLV), with Monday's early drop to 27.41, also landed on its long-term trendline from 2008 (see Chart 2). And technical momentum indicators, such as the relative strength index, dipped deep into oversold territory. In other words, this market got as overextended to the downside as it was to the upside in April. The crowd was stampeding to the exit doors in a panic leaving the market ripe for a rebound.
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Chart 2

SILVER ETF

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I am not quite as firm in my conviction on silver as I am on gold. The silver ETF moved below important near-term support at roughly 32.50, so there has been some technical damage. But at the same time, I am far from bearish with the evidence that is now on the table.

Gold and silver stocks are faring worse than their respective metals. For example, the Market Vectors ETF Trust Market Vectors Gold Miners (GDX) scored what chart watchers call a "bull trap" or false breakout this month. It traded in a range for nearly a year so this upside move was initially rather bullish. But when prices failed and fell back into the range, all bets were off. Failed bullish signals usually become bearish signals.

Its small capitalization cousin, the Market Vectors Junior Gold Miners ETF (GDXJ), continues to perform even worse. Last week, it plunged below the bottom of its own large trading range (see Chart 3).
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Chart 3

JUNIOR GOLD MINERS ETF

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Unfortunately, there is not enough history to look for a long-term trendline here, but last week's breakdown was indeed significant. And based on the size of the trading range, the decline has room to go.
The Global X Silver Miners ETF (SIL) also plunged last week and into Monday's trading. However, its pattern is a bit fuzzier rendering its breakdown less significant.

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However, it is easier to make the technical case for lower prices than for higher prices simply by viewing the declining trends in such silver mining stocks as Pan American Silver (PAAS) and Silvercorp Metals (SVM).
As has been the case for many months, precious metals are in better shape than their respective mining shares. And gold is in better shape than silver.

For the long-run, the technical reasons for higher-gold prices in the coming months are still good.
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Disclosure - Michael Kahn owns shares of GLD in his retirement account.

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Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
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