Stocks and US Dollar Charts Paint a Bearish Picture for Gold

By Przemyslaw Radomski, CFA  JUN 11, 2013 10:35 AM

Is the recent gold price collapse as great a buying opportunity as it seems?

 


The recent collapse in gold price hasn’t discouraged consumers across Asia -- and in particular, from China and India -- from buying the yellow metal. Taken together, China and India account for more than half of the total consumer bullion demand worldwide. What we are seeing now is an exceptional phenomenon because Indian demand for gold is up 200% from a year ago.

Gold demand in India, which is the world’s largest buyer, is heading for a quarterly record as imports reach 300 to 400 metric tons, the World Gold Council said in a report last week. Again, we’re only getting close to the midway point of the year, and the amount quoted by the WGC is equal to almost half of the total shipments for all of last year. We read that banks are actually being told to discourage gold investment and suggest financial products instead. Interesting, isn’t it?

It looks like Indian, Chinese, and Middle Eastern consumers are taking a long-term view on the prospects for gold. I’m not surprised you would want something to decline in price to buy more for yourself, but are you sure that the recent gold price collapse is as great a buying opportunity as it seems?

Let's look at the charts and search for some answers. We’ll start with the USD Index long-term chart. (Charts courtesy of http://stockcharts.com.)



In this week’s long-term USD Index chart, we see the index is still above the declining support line and the bullish medium-term outlook has not been invalidated here. That’s why last week’s decline has very little impact from this perspective. I discussed the underperformance of the precious metals relative to the USD Index several times last week beginning: "Gold is responding strongly to the dollar's rallies but responds less significantly to its declines. This is a bearish situation as it means that gold would likely decline even if the USD was just trading sideways.

This underperformance (responding less significantly to declines) was clearly taken to the extreme on Thursday.

The situation remains bullish for the USD Index. Does it look bullish for the general stock market, too? Let’s find out.


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As I wrote in my essay on gold, stocks, and the dollar on May 17,2013:

The situation is overbought on a short-term basis, but we do not expect to see an invalidation of the breakout above the 2007 high. If anything, we could see stocks move back to this level, which could further verify the breakout and allow them to gather strength in advance of the next rally.

Although the last correction was deeper than the previous one, it doesn’t change the overall picture of the market. As long as stocks are able to hold up above the 2007 high, the uptrend is not threatened. That’s why my firm thinks that the bottom for the latest decline may be in. The main buyers' arguments are certainly two support lines because price levels bounced off the intersection of them.

This could mean that the bottom in the stock market is in anyway.

Now that we know how the situation looks from the perspective of the dollar and the stock market, it’s time to take a look at the yellow metal itself.


Click to enlarge

In this week’s very long-term gold chart, we see that the trend remains down. Despite a $20 move up last week, the outlook continues to be bearish (it’s hard to take this small increase as a sign of improvement especially as we consider the whole decline).

Gold could still decline heavily based on the long-term cyclical turning point, which is due approximately this week. In both 2008 and 2009, local tops formed slightly after the cyclical turning point, so it is possible that the reversal in the downtrend won’t be seen until after the cyclical turning point once again, leaving a number of days in which further declines could be seen.

Summing up, the long-term outlook is bullish for the USD Index at this time. As for stocks, the situation remains bullish for the medium term, and although the last correction was deeper than previous one, we don't expect to see a bearish trend immediately. It seems that higher stock prices will be seen without further declines. Finally, gold’s picture provides us with bearish indications.

Overall, it seems that the final bottom in the yellow metal is not yet in.

We know keeping an eye on the market is very important to you, as you care about your savings and that’s why we hope you’ve enjoyed reading this essay and that it will help you to decide whether or not buy gold Asian style anytime soon.

Thank you for reading. Have a great and profitable week!

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.

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