August 15th, 2009

Gold (GLD) and Silver (SLV) – Part 7

Anyone who’s been trading for a while knows that today’s market is dramatically different than it was back then. I don’t have hard statistics to offer as evidence but I do know that what we call “stocks” today is much more broadly applied than only to equity shares in U.S. companies. Today, “stocks” include American Depository Receipts (ADRs) and exchange traded funds (ETFs) encompassing everything from foreign exchange and stocks to commodities and fixed income securities of all types. Today, for example, the Telechart charting system lists 6731 “stocks” but, of those, nearly 600 are ADRs and almost 1400 are ETFs and closed end funds. That leaves only 4700 conventional stocks; not a large number to pick from.

With price information now readily available, the question anyone interested in charts might ask is whether the charting techniques applied to common stocks also apply to all these “alternative” investment vehicles. The answer was driven home to me when I got my last Google Alert email on “moving averages” and “trendlines”. Of the 10 citations including the term “moving average”, five related to currencies or commodities; of the 10 citations for the term “moving average”, 4 related to currencies or commodities.

So there shouldn’t be any question that these tools identify the results of supply and demand or the action from investor sentiment when applied just about to any market. The commodities that seem to get most of the attention are the precious metals. I’ve written here a number of times since late 2007 when I first heard about the “need to protect from the weak dollar and the inevitable surge of inflation through owning precious metals”. It’s been a promise or threat, depending on which side of the debate you’re on, that hasn’t yet materialized even as gold (GLD) and silver (SLV) continue to fluctuate.

For example, I wrote on July 11, 2008 “the current concern is what appears to be the imminent demise and Federal bailout of Freddie and Fannie. But this increases the concern for the prospect of huge inflation on the horizon.” (contemporaneous charts of GLD and SLV). Rather than continuing to increase, both commodities failed to rise above previous highs.

On December 17, I shared a chart depicting the ratio between the price of gold and the DJ-30 showing that ratio to average 10 (the DJ-30 being 10 times the price of gold) or approximately equal to the S&P 500 (assuming the ratio between the DJ-30 and S&P 500 has also historically been 10:1):

The thing that many are hanging their hat on is that the low point of the ratio in each long-term cycle has been under 5 (or 0.5 for the S&P). So, either the market might again be cut in half or the price of gold should, based on historical experience, need to nearly double (1000 S&P/2000 Gold). So does the chart for GLD support a move up?

GLD is clearly bumping against a wall of resistance around 100 (or 1000 on an ounce of Gold) having made two attempts to cross it. But in the meanwhile there are to important but conflicting trends: 1) all the moving averages, the momentum indicators, are still pointing up and are bullish but 2) volume has been neutral or negative. A precursor for vaulting over that price wall is a significant turn in the volume trend; without it, another attempt will fail. Having a significant personal position in all things that glitter, I’m afraid saying that GLD could just as easily drop back to 70 as it can vaulting over 100.

SLV had a much more serious decline at the end of 2008 than did GLD; a decline that it hasn’t yet fully recovered from:

Both are trapped in similar channels although SLV had a much more serious collapse in the second half of 2008 than did GLD and is much further away from fully recovering from it. If they are able to generate some volume and if they do make another attempt at a breakout, the move could be eye-popping.

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  • Anonymous

    Guru,
    "GLD is clearly bumping against a wall of resistance around 100"

    Can you see very long chart for $USD? I used sharpcharts.com & it only showed 1987~today, so I cannot tell where the $USD going from here. thanks!

    oildigger

  • Guru

    Oildigger,

    You have more data than I do. Can you post a copy of yours somewhere and share it with us? What are you hoping to learn from it? Do you have gold and oil prices going back that far?

  • Anonymous
  • Guru

    Oildigger, thank you for the link. Would you share your thoughts on the implications: 1) further downside or is there an inverted h+s in the making leaking to a surge in value of $US 2) what does this mean for US stocks, ADRs, commodities, oil and precicous metals?

    If you'd like, it might be easier to answer in a discussion on the Stock Chartist Facebook Discussion page (I'm going to post a photo of this chart there).

  • Anonymous

    Guru,
    IMHO, from the chart dollar has hit a "bottom", and we're "going to be up for a year or two in the dollar. That is bad news for most other asset classes including stocks, & commodities.

    oildigger