The price of gold hit $1190 in the last couple of weeks and this has led to analysts putting some big upside targets on the rally. I have been far more cautious, looking for more confirmation of the strength of the bull trend before turning bullish. I may be cautious, but this could change if I see confirmation of a sustainable improvement. So, this begs the question, is this a good time to buy gold?
The argument for buying gold over the coming months pretty much depends on the actions of the Federal Reserve. The recent two week rally from $1104 to $1190 came aid a deterioration in US economic data that questions the viability of the Fed raising rates in 2015. If the data continues to deteriorate in the coming weeks then gold could continue its strong run higher. The last few months shows that once more there is a negative correlation between the dollar and gold (see below), so anything that pushes the dollar weaker (ie. bad economic data) should be supportive of higher gold prices. The next FOMC meeting is in a week and although it is extremely unlikely that there will be a rate hike, it will be interesting to see how the statement changes with regards to the international conditions and also the recent turn lower in the US data. The Employment Situation report in two weeks will also be crucial (again).
The technicals show that a 3 year downrtend has been broken – but do not be fooled into thinking that theis means that the bulls are now in control. This simply means that the bears have lost control. It could turn into a range play now, rather than simply pushing strongly higher. I do like the fact that the RSI is increasingly strong and the September/October lows saw the RSI bottoming around 40 before pushing towards 70. This shows increasingly positive momentum. Trading above teh 144 day moving average (the longer term trend indicator) is also a positive development. The near term support band is $1156/$1170 and is now where we find the gold price trading. If the bulls are to be in control this is where we will find the buyers returning (the 144 day ma is currently $1157). I see the support at $1140 being the limit of a correction that would enable a neutral outlook, but if $1140 is lost then the bears will be back in control.
What about gold versus silver? The Gold/Silver ration has long been rising since 2011, but at the end of August the ratio almost hit 80. This has tended to be the extreme level over the 33 years this chart has data. Although gold continues to trend higher (and has recently bounced off the uptrend once again). That would suggests that gold continues to outperform silver on a longer term basis but could the relationship be about to reverse once more?
What currency is the most bullish to be trading gold in? Gold performs best when a currency is weakening. Combining the three charts of gold traded in US dollars, euros and sterling; the chart below shows that gold is clearly the most bullish when traded in euros.
When traded in euros, the gold price has been building an uptrend over the past couple of years. The move has also pushed above the resistance at €1000 which has all but held a correction (with old resistance becoming new support between €968/€1000). The reason is that the ECB is engaging in QE and this reduced the value of the euro, whilst gold as a hard asset supposedly maintains its value. If the ECB extends QE, expect the gold priced in euros to perform strongly.
Compare this to the charts prices in US dollars and sterling (both of which have central banks that the market is anticipating will be tightening monetary policy soon). On both charts we find gold still trading in two year downtrend channels. The downtrend channel in gold priced in dollars, for me is one reason why we need to be cautious about putting huge upside targets on the gold rally. The channel high currently comes in around $1260.