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Since I’ve been a curmudgeon about the incessant rise of gold, I’m trying to force myself to look at the other side of the ledger. The last time we looked at the old relic commodity, it was to grudgingly accept that even if gold is in a bubble, it has quite a ways to go still.
We looked at the cross-currents in gold sentiment in the middle of May. Since then my timidity hasn’t been incorrect. Price has retraced a bit and basically gone sideways. Now it has floated back to where we left it. Sentiment right now is still positive but not extremely so.
We have the anecdotal magazine cover stories (Thanks to Steffan, our trusty man from Germany) and Market Vane’s Bullish Consensus is still hovering around 70%. As well the gold closed-end fund CEF is trading at a 9.86% premium. Finally, the bullish percent index for the sector has collapsed from 77.4% to 52% (after falling to a low of 42% in late May). That means that gold stocks could enjoy a rally before becoming overbought.
And if you just can’t get enough of gold sentiment indicators, I pity you, fool! Then quit your jibba-jabba and check out the Mr. T Gold Indicator, courtesy of Minyanville.
While I’ve benefited from identifying the parabolic blow-offs in gold, I’ve missed out on what happens next. As you can see from the chart below, the recurring pattern after the parabolic tops has been a retracement and then a sideways range which forms a cup and handle technical formation.
Cup & Handle with Care
The formation can be a bit sloppy but the criteria for it is defined as a counter-trend retracement that lasts several months and takes prices down to the long term trend line. Price then recovers to the previous high only to then enter a second retracement that lasts a much shorter time frame and is much shallower.
The result is that resistance is eroded and the next upleg begins after a break above the previous high. This is similar to the view that Adam Hewison shares in this short 2 minute video about gold with a focus on the $1240 level to provide a potential breakout to the upside.
The difference between a bubble and a bull market is that in the former you’re a spectator and in the latter you’re an investor. If gold is in a bubble, then it would still have to rise to about $3000 (give or take a few oz.) to equal the trajectory of other bubbles like the housing market or the Nasdaq tech bubble. That dovetails nicely with this chart, courtesy of David Rosenberg of Gluskin Sheff, showing the Dow Jones Gold ratio:
A true bubble top would take this ratio back to 2-3 where it has bottomed before - not inconsequentially at the end of secular bear markets. As well, parabolic blow-offs like the ones in the chart above are good short term technical signs of exhaustion but if we look at the long term chart of gold (say from 2000 to now) the trend is still very much linear. When this long term trend itself goes parabolic, then I think we’ll have a good indication of the end of the gold secular bull market.
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