Does “Higher Gold” Need
a New Story?
By Przemyslaw Radomski, CFA
We have been
writing about a bullish outlook for gold, silver and precious metals mining
stocks for quite some time now, even though the seemingly bad situation in these
markets. This opinion is based on a sound rationale (excellent fundamental
situation for precious metals and extremely negative investors’ sentiment often
seen at important turnarounds, among others) but we understand that it is still
hard to be bullish, looking at the charts that have been full of moves down for
the last couple of weeks. We have received an interesting question from one of
our subscribers that shows one misconception (in our opinion) about what is
needed for a rally in the yellow metal that we would like to comment on:
Hello, "The fundamentals, such as open-ended QE, have been factored into prices.
So ‘higher gold’ needs a new story. Investors are no longer excited about the QE
story. If there is no other bullish story (how can a story be more bullish than
open-ended QE?), the price of gold price will likely go lower." Could you please
comment on this? Thanks! Regards.
fundamentals, such as open-ended QE, have been factored into prices.
Yes, we can agree
with that. The information has been around for a while, people are aware of
gold’ needs a new story.
Here we disagree.
If a story as bullish as open-ended QE doesn't make gold go higher, then what
story could? Maybe it's not a new story that is necessary?
no longer excited about the QE story
Investors are no longer excited (!) and that's the whole point. Open-ended QE
and other fundamental factors are positive. All that is missing is this
"excitement." This is another way of saying that the situation looks good but
people just don't want to buy because they are afraid of losing money. Is the
fear really rational? If we agree that the fundamentals are positive, then it's
not rational - it's purely emotional and caused by extensive consolidation.
If there is no
other bullish story (how can a story be more bullish than open-ended QE?), the
price of gold will likely go lower.
sentiment becomes extreme enough (extremely negative that is), we will see a
turnaround even without an additional story. The fundamentals are already great.
Now, a great story (Cyprus-led bank run?) could trigger the rally faster, but
it's not required for the gold market to move higher in our view.
What is exactly
gold doing now? Let’s take a look (charts courtesy by http://stockcharts.com.)
Gold’s rally is
finally visible here, and the
RSI levels (based on weekly closing prices)
reflect this as well. This
indicator is back above the horizontal red
line after staying below it for several weeks. This same action was seen back in
2008 and was quickly followed by a significant
rally in gold prices. Back then, after the
final bottom formed, gold moved to its previous high shortly.
Last week we
a small breakout in gold viewed from the euro perspective
– let’s have a look at this chart to see how the situation progressed.
We saw a break
above the declining resistance line early last week. The breakout has been
confirmed in terms of range and time. Prices moved high enough to be visible in
the long-term perspective and stayed above this line for three consecutive
trading days. The situation here is very bullish.
Let us now move
on to the chart that shows us the yellow metal’s performance from the general
non-USD perspective (the average of gold priced in major currencies), as a
similar situation to the above chart seems to have developed there. In short,
the following chart represents and average of gold price from the previous chart
and other non-USD ones.
Here we see what
amounts to a small breakout so far. Prices are close to but slightly above the
declining resistance line and have been there for three consecutive trading
days. However, since this is a long-term chart, we prefer to see at least one
weekly close above this line to say that the breakout is confirmed. In any case,
the outlook has improved this week from a non-USD perspective. Actually, gold
closed last week right at this line, but moved above it on Monday as gold didn’t
do much from the USD perspective, but the USD Index rallied.
up, gold recently broke above important resistance
lines so when viewed from the euro perspective or when non-USD averages are
taken into account, an already bullish situation has improved even further.
Overall, the outlook remains bullish for gold and – as we’ve mentioned at the
beginning of this essay – we don’t think that any breaking-news story is really
needed to spark off the long-awaited rally in the yellow metal as the situation
is already extreme. It could, however, cause the rally to start sooner.
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Thank you for reading.
Have a great and profitable week!
Gold & Silver Investment &
Trading Website - SunshineProfits.com
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All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
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above is based on careful research and sources that are believed to be accurate,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
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