We recently wrote that a period of consolidation would be 'constructive' for gold before moving higher, possibly even a flushing out of weak longs on CME before stabilizing. Fat chance.
Why were we wrong and what does it tell us about the psychology of the market ?
Recent economic events in both Europe and the USA (US debt re-rating and banning short -selling in eurozone coupled with buying of Spanish and Italian debt) were politically inspired economic stop gaps. No more. We are yet to see long-term sustainable policies in place to put the over-indebted nations back onto the path of financial probity. What we read in gold's price action is that clearly the relief rally (in equities) from these recent policy decisions have been brief and the market remains impatient and skeptical.
Gold is currently trading at $1794/ounce and a fresh test of the all time high of $1813 is on the cards in the next few days–- probably Friday (we always seem to have the big moves up on a Friday afternoon London time).
We do hold to our view that gold is in overbought territory technically. Long-term investors looking at a 30-week trend for gold will have seen gold extend 20% beyond its trendline only three times since 2007 and in the last two occasions (March 2008 and December 2009) it sold off sharply and reverted to its mean. We are there again today at 21% above the trend. Bollinger bands are also a good guide and show the deviation of prices from 20 period average points on a weekly chart – a similar gauge if you like. We are presently beyond the upper limits of the bands again, suggesting that gold is technically overbought.
These guides tell us gold is due a rest.
Another guide for us is an unusual one – hit rates on our website relating to gold news – these provide a remarkably prescient measure of market sentiment and these point very much towards higher prices. Yesterday we saw a significant step up in web traffic which normally presages a leg up in gold by ordinary retail investors. My instinct tells me that the latter will carry the day.
So are we in a bubble? Our view is no, but the potential to be so is very much there.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.