A new all-time high, caution is warranted

Gold is holding over $1040 as of Tuesday, and it’s tempting to think the parabolic move will take off from here.

It might. But there are some negative signs.

First, a short-term high is due October 8. That’s today. The decline after a short-term high to the next short-term low may be minor, but anyway it’s worth keeping this in mind.

Second, October has been a bad month for gold, from a seasonal perspective. A typical pattern is a high in early October then a pretty severe decline.

Third, the HUI or mining stocks are not confirming the move in gold. This is definitely a bad sign. The HUI is still under its recent peak in September and is quite a way away from its all-time high (440-450 now vs. 520 in Mar 08).

Fourth, RSI has hit 80 and stochastics are still lower than they were at the peak in September. The first is a sign of a peak and the second is a non-confirmation of a high.

Fifth, and most importantly, the dollar is just bumping along at close to 76 on the dollar index. Remember, the all-time low is close to 71. So it certainly doesn’t seem like the dollar is collapsing just yet.

The recent bad news on the dollar is the news out of the UK about talks between China, Russia, the Middle East and various other countries about using a basket of currencies, not including the dollar, for oil. One more nail in the coffin. It’s no secret the Middle East is keen on gold as a currency.

Here is the article:

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

Well, there has been endless bad news about the dollar, starting with the Federal budget deficit, but if you were China, would you want the value of your currency reserves to sink like a rock? China is actively buying things with its dollars - commodities, companies, gold, and it still has a lot to get rid of.

Finally, the other bad sign about the current high in gold is the strength in US Treasuries. This is a sign of deflation not inflation.

Equities are hanging in there, but it feels like they may be weakening. Some analysts are still gung ho on the market. It’s a tough call but maybe equities will hang in there a bit longer. October is also a bad month for them, and several market crashes have occurred in October.

There is a lot of good news priced into the market, so a little bad news could have a big effect. Recent unemployment figures were bad but things have recovered. What’s next? Commercial real estate loans causing another round of bank failures?

The point is, if markets crash that could usher in a bout of deflation. Perceived deflation, at any rate. That would be bad for gold, and especially for mining stocks and silver.

Rosen’s summary at present: the new all-time high means an extended flat correction may be in the cards, or it might still be a regular flat correction. In an extended flat correction, the B wave peaks above the top of the A wave, but then the C wave goes below the bottom of the A wave. Most analysts seem to think the critical level for gold is $1050, and anything in that vicinity is close enough to the previous all-time high around $1033.

If gold convincingly breaks $1050, it might be time to be less cautious. Regardless, there will be a pullback, as there always is, and it still seems like the critical level is $960, if and when we get there.

This entry was posted on 08/10/2009 at 05:24 am and is filed under Gold. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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