Trader’s Narrative

Gold futures (December contract) closed higher at $709.70 an ounce today and dragged with it gold stocks. While many journalists claim it was today’s atrocious jobs data, I doubt it.

That explanation may be neat and tidy but it is useles since gold and gold stocks started this short term rally a while ago, before any attention was focused on economic data.

Most probably the real reason why the gold sector has been doing well lately is that it was extremely oversold. In mid-August when I wrote about gold and gold stocks getting clobbered, I ended by saying:

…right about here I think gold stocks are ripe for an oversold bounce. Nothing fancy, just a tradeable rally.

Within the Gold Bugs Index (HUI) zero gold stocks closed above their 10 day and 50 day moving average. And only 7% closed above their 200 day moving average. Wouldn’t it be hilarious if gold stocks rallied along with the stock market?

Maybe not as hilarious as profitable. Hope you got yours.

Now the gold bugs are getting excited but I find no reason to join them in believing that gold is going anywhere in the medium to long term. For one, it has worked off a very extreme oversold technical condition. Now we have 50% of gold stocks above their 200 moving average. When I told you about this upcoming bounce there was only around 10%.

The other reason is that both gold and gold stocks are still mired in a trading range. By the time they make it up to the upper resistance level the technical picture will be overbought and they will get slapped back down again. Had this mid-August technical oversold condition occurred when the AMEX Gold Bugs Index (HUI) was just below 400, things would be very different.

The final reason is that according to the k-ratio that I’ve mentioned many times, the gold bull market is over.