GOLD BULL STILL HAS LEGS / BARRON´S MAGAZINE ( A MUST READ )

Weekday Trader

MONDAY, JUNE 27, 2011 

Gold Bull Still Has Legs
By MICHAEL KAHN

Despite concerns that the yellow metal has topped out, the technical evidence suggests that the bull market is intact.

People began to worry about the gold bull last week when -- in just two trading days -- the price of the yellow metal fell by $52 an ounce.

That's a big drop for a metal that has mostly risen in recent years but has shown signs in recent weeks of topping out.

But the long-term bullish trend for gold is very much intact. And that means investors should not flee the yellow metal.

Over the past two months, the gold market moved sideways as technical indicators of momentum faded. With this shaky backdrop, a combination of two factors - a firmer dollar and falling oil prices - took their toll.

Since gold is priced in U.S. dollars, strength in the greenback helped push the metal's price lower. (The dollar and gold mostly move in opposite directions.)

And news that the International Energy Agency would release more crude-oil supplies into the market to offset lost Libyan production brought down oil futures.

We've seen this before. Stress in one market causes losses in another as traders scramble to raise capital through sales. With gold trading close to all-time highs, it was a readily-available source of funds.

Technical analysts now see two broken short-term features on the charts. Gold is now trading below both the rising trendline from January 2011 and the 50-day moving average (see Chart 1). If taken alone, this would be a signal for investors to sell their holdings. However, since the long-term bullish trend in force since 2008 is very much intact, the signal is less important.

Chart 1
GOLD

In other words, the current weakness in gold is a correction in a long-term bull market. That suggests investors should look for a place to buy more gold, not sell their holdings.

The question is where will gold find its footing and resume its march higher. On the charts, there is strong support between $1440-an-ounce level at the top of the 2010 trading range and $1470 at last month's lows.

Buyers are likely to become more active as they see a second chance to buy at levels that provided good opportunities in the recent past.

Seasonally, gold struggles during the summer months and strengthens again in August, according to John Person, president of National Futures and co-author of the Commodity Traders Almanac. This behavior is not unlike the "sell in May" mantra for the stock market although for different reasons.
He added, "I see a 3%-5% correction possible from today's levels by August where I would look to go long."

Kevin Schweitzer, senior vice president of institutional sales and trading for the Maxim Group in New York, thought that Monday's expirations of gold futures options added to the selling pressures in the short-term. However, he sees gold heading toward $1650 and beyond after August and into the end of the year.

In May, I wrote here that investors were better off owning the metal via the SPDR Gold Trust (ticker: GLD), which is pegged to the price of bullion, rather than in gold-mining stocks via the Market Vectors ETF Trust Gold Miners (GDX). This is still my view today as the metal continues to outperform mining stocks. (See Getting Technical, "The Trend Is Gold Bullion's Friend," May 18).

The technical damage done to the gold-miners ETF over the past two months was significant. Prices that brought out buyers on several occasions this year did not stop the bears. And the long-term rising trendline from 2008 has been broken to the downside.

Gold, the metal, is in a much better state.

In summary, gold suffered a short-term break but remains in a long-term bull market.

Short-term events, such as the release of strategic oil reserves and even Monday's gold options expirations may have added to the steepness of the current correction. But summertime weakness is normal and there is a strong floor approximately 2%-3% below current trading.

Despite the recent drop, gold is still glittering.

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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