WEDNESDAY, MAY 12, 2010
What Are the Charts Saying About Gold?
By MICHAEL KAHN
When the dollar rises, the yellow metal usually falls. The fact that gold has defied that norm lately is telling.
WHEN THE U.S. DOLLAR GAINS against other currencies, most commodities tend to move lower, all else being equal. Last week, when the dollar soared against a basket of its counterparts, commodities such as crude oil and soybeans indeed fell hard. Gold, however, set a five-month high.
Last December, I wrote in this column that after a major correction gold would continue on its journey to $1350 per ounce (see Getting Technical, "Gold's Next Leg Up is $1,350 an Ounce," December 7, 2009). Now that gold is comfortably over $1,200 an ounce, I see no reason, including the US dollar's current rally, to change that view.
It goes back to the "all things being equal" clause in the dollar/gold relationship. All things are apparently not equal. Doubts over the efficacy of the European bailout plan and mountains of government debt are sending investors flocking to the perceived safety of gold in its role as hard currency. Paper money, even the US dollar, does not have the same appeal.
Another casualty is the demand for commodities as raw materials for economic activity. I'll leave the detailed economic prognosticating to economists but the markets are saying that there is no special reason to own commodities. The continuous commodities index (CCI) of 17 commodities futures prices has been flat for the past seven months (see Chart 1). The rising dollar has kept prices in check.
Chart 1 
The CCI is the old version of the CRB (Commodities Research Bureau) index and it retains its agricultural commodities weighting. Most other widely watched commodities indexes such as the Goldman Sachs Commodities Index (GSCI) have a much higher energy component so I prefer the CCI when analyzing commodities as an asset class.
Gold, and only recently silver, has been the star of the class.
Copper, though a metal, has a different story. Economists focus on the price of copper as an indicator for economic health as it is an integral input to key industries. Demand for copper suggests health in housing and many other manufacturing sectors of the economy.
Unfortunately, demand for copper in the futures markets is down. Two weeks ago, I wrote here that the trend for copper had turned for the worse (see Getting Technical, "Crunch Time for Stocks," April 28, 2010).
Since that time, copper has had several negative technical developments. To keep the jargon light, we can say it is now under both its 50-day moving average and a second trendline drawn from its 2009 low. And over the past week, it has only been able to muster a weak bounce following its April tumble.
In other words, it has generated no power to overcome the effects of a rising dollar.
Crude oil has also been weak this month. Energy markets are usually separated from "commodities" due to their tendency to move based on geopolitical factors as well as economic factors. The former is one reason why I maintain a positive long-term view but in the short-term there are technical problem.
Specifically, this market failed to hold the upside technical breakout it made in March. It has tracked the CCI index over the past few weeks giving it a net gain of zero since November. Therefore, as with copper, it has no power to overcome the effects of a rising dollar.
But gold does have the power. The only problem I see now is that a frenzy seems to be building as it did last November before the yellow metal reached what was then an all-time high (see Chart 2).
Chart 2
It is impossible to say how far gold can run in the short-term before corrective forces take over but according to the long-term trend a small correction should provide another opportunity to buy.
Right now, gold, and to a lesser degree silver, is acting differently than other commodities. The disparity in trends is interesting to say the least. Let's hope that the old Chinese curse about living in interesting times does not apply here.
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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