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The Cool Kids Still Like Gold

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This commodity will continue its journey until all the other kids start noticing.

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I just love it when I run across an article like the one I just read in the Wall Street Journal this week.

The headline: Gold Is Still a Lousy Investment

I read it differently, as: Gold Still Has a Long Way to Go

You know you've reached the top in a bull market when the shoeshine boys and taxi drivers who heard a hot tip are clamoring to get in. Two years ago, when people in cocktail parties in Florida were talking about how you can't go wrong in Miami real estate, you knew it was time to sell.

That's why an article like the one that ran last week in the respected, mainstream Wall Street Journal helps me sleep well at night with the knowledge that precious metals still have a long way to go.

The above type of analysis (reading headlines) is useful in estimating the long-term tops, but if we want to check what may be in the cards during the next few days, weeks, or months, we need to turn to charts:

USD Index


Source: stockcharts.com

The weekly perspective on the USD Index provides us with a perfect view of how the dollar moved lower after touching the upper border of its declining trend channel. Since there were voices (certainly not mine) saying that this resistance level will be broken to the upside, the fact that USD in fact resumed its main trend is important news this week.

For now, the support level just below 76 (created by the September 2008 low) hasn't been broken yet, but it's likely to take place soon given the prevailing trend, and especially when comparing this support to the one that USD broke through several weeks ago. The December 2008 low (recall the December 18 Market Alert when the low was forming) was much more significant, yet it took only a few weeks for USD to go below it. Needless to say, it happened just after the dollar touched the upper border of the declining trend channel.

This is exactly what took place last week, so it wouldn't surprise me to see the dollar lower soon. I realize that the RSI Indicator is currently near the 30 level, which generally means that an asset is undervalued, but please note that in the past, most times this was the case meant further declines, not rallies. I've marked these situations with black ellipses on the chart.

The particularly interesting thing here is that once we go below the thin red line that marks the previously mentioned support level, we don't have virtually any other support all the way to the 71 to 72 area. This is obviously much lower than where USD is today, so the implications for the precious-metals market could be huge, especially given the strength of gold's reaction to the recent move in USD.

Gold


Source: stockcharts.com

I've used the red exclamation mark as the description of this week's price action, as its consequences are very important. The message of gold above $1,000 goes throughout the world and many investors, who were hurt in the stock market, now begin to wonder whether or not precious metals might be a good way to go. This is exactly what a bull market needs to move higher -- a new buying power. Even if one of the markets driving gold in the short term (i.e. the general stock market) moves lower, I'd still expect the $1,000 barrier to hold as a support.
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No positions in stocks mentioned.
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