Gold Update: Precious Metal Stuck in the Short Term

Gold Update: Precious Metal Stuck in the Short TermIf you’re looking to make money playing the long side in gold, you may want to wait a bit unless you are willing to trade the range. The yellow metal is no longer in a bear market, but it is also not ready to rally much higher in the short term.

On the supportive side, we have the eurozone mess, slowing in China, and high overall market risk.

Since cash gold traded at a record $1,920.18 on September 6, 2011, the precious metal has declined 16.7%. Even after the recent break back above $1,600 to $1,629.20 on July 27, I still sensed that prices were not sustainable and would be heading back below $1,600. This downside move occurred on Wednesday, following the break below $1,600.

I continue to feel $1,600 will not be sustainable.

The established range is between $1,525 and $1,600. A bearish death cross remains on the chart, with the 50-day moving average (MA) of $1,592.93 well below the 200-day MA of $1,654.01.

The threat now is the 11-year streak, as gold is down 7.1% since January 1. The one-year return to August 1 is -2.96%.

Clearly, much of the easy money in gold has been made for the time being.

Just take a look at the multi-year returns to July 1, 2012, in the following table.

multi-year returns

So while gold is currently stuck. I’m not ready to give up, but then I would also be more careful in adding positions, whether in physical gold or gold stocks. The reality is that the current technical picture has a slightly bearish bias and is void of any buying interest.

If you are trading gold, adopting a buy low and sell high strategy could work here. A decline towards $1,525 would represent an excellent buying opportunity in the metal.

The neutral Relative Strength Index (RSI) will place a drag on prices. A break below the 13-week low of $1,527.52 would be bearish. A further move down to $1,512.88, if gold fails to attract any buying support, could be in the works, with a breach of $1,500 a realistic possibility.

Looking at it from another angle, the fixed exchange rate between gold and silver was 15.5:1 in the nineteenth century, but moved much higher to average 47:1 in the twentieth century. The spot gold price was $1,599.06 on Wednesday, compared to $27.30 for spot silver. This equates to a current gold-silver ratio of 58.6, which means the price of gold could fall further to the average—implying a price of $1,283, down another 19.8%. Of course, silver prices could be undervalued based on this ratio and could head higher. Moreover, silver is a play on the economy and could rally if the economy picks up. China is scouring the world for resources, and silver could benefit. (Read “China on Global Hunt for Resources.”)

Given the current situation, my advice is to adopt a wait-and-see approach and see if there’s a rally back to above $1,600 or a retrenchment back to its previous trading range.