I’m beginning to change my tone towards gold. After being patient since October 2011, I’m inclined to feel the yellow metal is now more of a trade than an investment.
In a sign of optimism, gold recently broke above $1,600 an ounce on the banking concerns in Cyprus, as traders flocked to the metal as a perceived safe-haven pick. As an investment, gold has underperformed in recent years, while the equities market has surged higher. The reality is that there are far better places to stash your capital other than gold, and I expect this will continue.
Gold has long been perceived as a safe haven for capital in times of turmoil and inflation. Yet if you look at the current situation, gold is stuck. Global inflation is under control, and unless we see a major war break out in the Middle East or Italy collapses, I’m becoming less optimistic on the buying of the yellow metal as a place to invest.
Famed investor George Soros recently cut his gold holdings, but Paulson & Co. made no changes (Source: Rooney, B., “ Soros dumps gold as prices sink,” CNN Money, February 16, 2013, last accessed March 28, 2013.)
With the stock market holding and returning big, gold investors have seen very little action, with the exception of the precious metal’s recent foray to above $1,600. I feel the move was more of a knee-jerk reaction to the Cyprus situation, rather than the start of a new upward leg on the chart. As I said, it will take a lot for the yellow metal to break back and hold above $1,600, and it will take even more for gold to retest the upper channel resistance at $1,800.
Overall, there is a lack of buying interest across the board, as sentiment remains lackluster due to better investing opportunities elsewhere.
In my view, gold continues to be at a crux. It could continue to trade in its sideways channel, where you can simply buy on weakness down to $1,550 and sell on rallies.
I really don’t see any other trade for gold at this point.
The stock chart for gold below shows sideways trading with major support near $1,550 and upper resistance at $1,800, as indicated by the horizontal blue lines. Within this trading band, there’s a downward trading channel, as indicated by the downward-sloping blue lines. The surfacing of a bearish “death cross” on the chart is a red flag.
We saw a similar situation in February–May 2012, prior to gold’s rally back to its upper-band resistance. I’m not saying this will happen again, but the recent trading action suggests this.
Should the precious metal falter back to $1,550, there may be an opportunity to buy, based on my technical analysis; but be careful, and watch for a breakdown.
Chart courtesy of www.StockCharts.com
Any major declines in the precious metal toward $1,550 should be viewed as a possible opportunity to make a trade on gold and nothing more.
With the excess liquidity pumped into the monetary system by the Federal Reserve and central banks around the globe, gold as an investment could be dead for a while.