BEING STREET SMART November 17/04
by Sy Harding
November 17/04
THE GOLD SECTOR!
Our indicators remain on the buy signal of August 18 for the
gold sector.
Closing yesterday at $438.60 an ounce, and up another $2.70 in early
trading this morning (at least at the moment), at $442.50, gold has just
about reached our upside target for this rally, which was to the upper
limit of the trading band around its 30-week m.a., which has pretty well
confined gold for years.
Reaching an upside target is not a sell signal, but it does tell us to be watchful of our technical indicators. Having reached the upper limit of the trading band, gold could continue to slide up the rising upper limit line as it did for several months late last year. Or it could break out of the trading band to the upside for a final spike-up, as it did in early 2003. Or it could hit the resistance at the upper limit of the trading band and immediately head south.
XAU Index of Mining Stocks.
After four failed attempts since last March, the XAU finally broke above its 20-week m.a. in August, and remains there, in the usually bullish upper half of Bollinger Bands. The XAU also continues in a pattern of higher highs and higher lows since rallying off the long-term trendline support (the lower rising blue line).
So that you would not be shaken out by the down days, for several weeks
we have been warning that the XAU had spiked fairly well above its 20-week
m.a. (the centerline around which Bollinger Bands are calculated), and
was liable to become choppy as it allows the m.a. to catch up. And that
has certainly been the case, with the XAU experiencing some dramatic down
days, but then rallying again to make new closing weekly highs.
The intermediate-term technical indicators have not yet reached overbought levels usually achieved before rallies top out, but some short-term indicators (not shown) are in overbought territory, and the XAU is approaching the potential resistance at its 2003 peak of 113. So further reasons to be watching closely. Yet we have to be careful not to be shaken out by the down-days that are liable to be part of continuing volatility in the sector.
Gold received a piece of supportive news this week in the surprise jump in inflation as measured by the Producer Price Index. It surged up 1.7% in October, its fastest monthly rate in 14 years. Inflation based on the PPI has now run at 4.4% over the last 12 months, a considerable increase over the 1.5% levels when inflation (and interest rates) were at 40 year lows a couple of years ago. The increase in the PPI pretty well guarantees the Fed will have to continue raising interest rates.
The U.S. Dollar.
Overall, the dollar continues its dizzying decline of the last 4 years. And gold continues to move opposite to the dollar. Gold's rallies take place when the dollar is declining, and gold's pull-backs take place when the dollar manages to stage a rally of several months duration.
We use the following chart of the U.S. Dollar Index as one of our tools
in determining the direction of gold. The index's 20-week moving average
tends to act as a powerful magnet for the index. When the dollar is in
a bull market, but periodically becomes over-extended
above its 20-week moving average, as at 1, 2, 3, and 4 in the following
chart, the m.a. pulls the dollar back down. When the dollar is in a bear
market, as it has been for the last four years, the U.S. Dollar Index
periodically becomes oversold (over-extended beneath
its 20-week m.a)., as at A, B, C, D, and E in the chart. It then tends
to rally back up to at least retest the overhead resistance at the m.a.
The dollar index then either fails at the m.a., and immediately resumes
the decline, or enters a pattern of lower highs and lower lows, and eventually
breaks out of the triangle to the downside, to resume its decline.
As it relates to gold, pullbacks in gold (even as its new long-term bull
market continues) tend to take place once the dollar index becomes oversold
beneath its 20-week m.a., and then begins to rally back up to the m.a.
The dollar's most recent breakdown out of a triangular pattern resulted in new multi-year lows for the dollar (and new multi-year highs for gold). But the dollar index is beginning to become oversold beneath the m.a. again. However, the m.a. has rolled over and begun to decline more steeply. So the dollar could just continue down with the m.a. keeping pace, as in mid-2002, and late 2003, and not become any more over-extended beneath its m.a. But seeing the Index well beneath the m.a. again is another reason that we need to begin watching our gold indicators closely.
CRB Index of Commodity Prices.
As we have been saying for a couple of years, we believe that, despite what the government's hoky PPI and CPI inflation gauges show, we are in a period of rising inflation. And rising inflation is a positive for gold. But we use the CRB Index of Commodity Inflation as a better gauge of inflation as far as gold is concerned.
The chart below does show that there was a topping out of the CRB beginning
at the first of the year, and like the rally in the dollar, that decline
in the CRB coincided with the decline in the gold sector earlier in the
year. But as also shown in the chart, the CRB did not break below its
rising trendline that has been in place since 2001, and in August began
rising again off that trendline support. And sure enough gold began to
rally again, and has reached new multi-year highs.
Putting it all together, we remain on our latest buy signal for gold,
but recognize that the long-term bull market for gold may be interrupted
at any time by another intermediate-term pullback.
A new long-term target: Gold reached our upside target for 2004 of $440 an ounce. We are looking for gold to rise above $500 an ounce in 2005. But it won't be in a straight line up.
Long-term support for gold should continue to come from rising inflation, dollar weakness, and gold's attraction as a safe haven in times of international uncertainties, all factors that are not liable to go away any time soon.
Sy Harding is president of Asset Management Research Corp., publisher
of The Street Smart Report Online at
www.streetsmartreport.com and author of 1999’s Riding The Bear
– How To Prosper In the Coming Bear Market.