In our previous essay we’ve commented on the precious metals stocks, and since that time we’ve received many questions about the yellow metal itself, we would like to provide you with a more information regarding that particular topic.

Let’s begin with the long-term chart of the SPDR Gold ETF (NYSE:GLD) (charts courtesy by http://stockcharts.com/.)

We see a situation similar to what we reported last week on the long-term gold chart. The self-similar pattern is again useful and indicates we may be seeing a repetition of October-November 2009. This is confirmed by both the RSI level and the shape of the stochastic indicator. As a reminder – self-similar patterns are situations when the past price patterns repeat in a very similar manner, at times (as above) in a bigger or smaller scale – meaning that a 10-day move, could now translate into a 15-day one.

Having said that, let’s move to the short-term chart.

The short-term chart this week may appear quite perplexing at first glance. The price has perfectly followed the Oct-Nov 2009 pattern, but we have not seen huge volume levels. What one needs to keep in mind here is that at the beginning of November, volume levels initially were quite low (before the point marked with vertical dashed line), followed shortly thereafter by a tremendous increase (right after the point marked with the vertical dashed line.) The second thing that one needs to recall here is the fact that the scale of the pattern is bigger this time, which means that a few additional days on low volume are not necessarily a bearish sign. Still, if we don’t see higher volume along with rising prices soon, it will make us concerned about the existence of this particular rally.

There’s one more thing that we’d like to comment on regarding the “is this 2008 all over again” question and that the way that gold is likely to react even if we get a substantial decline from here in the main stock indices. We all remember how gold (and also the rest of the precious metals sector) reacted to the severe plunge in the world’s main stock indices – it was far from amazing. In fact, gold got smashed along with everything else, as many (institutional) investors were required to raise cash

Here’s how it can develop:

A hedge fund manager sees that his stocks are declining, so he thinks of selling some of his other investments (including gold), as this he recalls that everything declined back in 2008. However, before clicking the “sell” after having selected his gold position on his trading platform he decides to give this idea a second thought.

Hey – wait a second – gold moved temporarily lower, but just a year and a half after the decline started it moved about 20% higher, so in fact that decline was just a temporary phenomenon. In hindsight – there was nothing to be worried about – in fact, why did I sell back then?! Fundamentals didn’t deteriorate, so why did I jump out of my gold position, when everyone else did? Hmm… I guess I panicked with everyone else. There were some margin calls that I needed to comply with, but there were other ways of raising that cash besides selling gold. Well, I can’t fix what already happened, but I sure can learn on the past mistakes and make better decision this time.

Let’s take a look at our quant team report… Wow! There’s no way I’m selling gold this time! The correlation coefficient based on the last 3 years equals -0.42, which means that on average gold used to move rather in the opposite direction to stocks, so maybe if stocks decline from here, gold won’t fall at all… It’s a tough call, but even if it moves down temporarily, it’s still likely to rebound soon and move to new highs, so why would I risk not getting back in near the bottom?

Besides, I know that John, Andy, Michael, and Daniel have also noticed gold’s extraordinary performance just after the bottom was put and their quant team’s have the same correlation coefficient, as we have and I sure don’t want to have a lower rate of return than they do! So, I’m keeping my gold this time – I will have no trouble in explaining this action to my clients since they are aware of gold’s performance.

As you may see, the above thought process appears rational, and if many institutional investors follow it, it might result in the decline in gold being minimal even if the general stock market plunges. After all, if many wealthy investors (that might influence the market) decide not to sell because they will believe the coming downturn is just a very temporary phenomenon, such downturn may not materialize at all.

Summing up, overall the situation for gold appears bullish. However, it is unclear if we are seeing the early stages of a big rally like November 2009. We would need to see a confirmation in the form of a visible upswing along with very large volume levels before stating that higher prices are likely. More short-term details are available to our Subscribers.

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Thank you for reading. Have a great and profitable week!

P. Radomski

Editor

http://www.sunshineprofits.com/

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Investors have turned to gold ETFs as a safe haven during the recent stock market turmoil.  They offer a great way to protect you against risk in your portfolio during uncertain times. We have put together some other ETF options for your viewing below including some inverse gold ETFs for you to take a look at:       

LONG:            

The investment SPDR Gold ETF (NYSE: GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.            

The investment ETF (NYSE: GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.            

The Funds ETF (NYSE: GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”            

The objective of ETF (NYSE: SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.            

The investment ETF (NYSE: UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.            

The investment ETF (NYSE: DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.            

The investment ETF (NYSE: DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.            

The objective ETF (NYSE: IAU) of the trust is for the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust’s expenses and liabilities. The trust is not actively managed. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.            

SHORT:            

The investment ETF (NYSE: DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.            

The investment ETF (NYSE: GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.

Related posts:

1. Part II – Stocks: Like March 2008 or August 2008? (SH, TLT, UUP, SPY)
2. Gold Stocks Complete First Major Bottom Since 2008 (GLD, GDX, GDXJ, IAU, DZZ)
3. Will This December Be Similar To 2007 & 2008 For Gold & Stocks? (GLD, GDX, GDXJ, DZZ, IAU)
4. Are Bonds About To Plunge? What Are The Implications For Stocks & Precious Metals (TBT, TLT, SLV, GLD, SPY)
5. Why A 2008-Type Scenario Is Now Unavoidable; 2012 Will Be Worse Than 2008 (XLF, UYG, FAS, FAZ, SKF)

NYSE:GLD, SGOL