Gold Futures at Critical Juncture

Have you followed the gold story since 2000 ? Even if you have not followed what gold futures have been doing since the year 2000, chances are that you have at least heard through the popular press about the exciting moves in gold during 2003. The long journey of gold futures from the 2000 lows up to the 2004 52 week highs sure has been an interesting and exciting one.

Let’s face it, most US investors and traders focus their attention on the broad market, paying little attention to the tiny gold market. The Gold market is a small and unique market that rarely gets any sort of mainstream press attention. It has its own special nuances that make it unique and potentially very profitable for those able to identify major trend changes.

I am going to be covering gold futures here at the Stock and Commodity Trading forum quite a bit over time. It is definitely in my opinion worth watching and also important on many other levels for the simple reason that a long term rising gold price means trouble for many other market sectors.

How Familiar are you with the Gold Futures Story?

Gold Futures declined in a massive long term bear market from 1980 to the year 2001. At the lows of 2001 the consensus was that gold futures were just an ancient relic no longer needed by society. So you had plenty of bearish consensus at the 2001 lows.

Precisely at that time however gold futures were making a double bottom and a rounding bottom technical pattern hinting that the smart money was accumulating the metal at that time. The accumulation then transformed itself into the mark up of the gold price launching gold into a new bull market.

That bull run in gold futures between 2001 and 2004 was directly related to 100% to 700% upward moves in many gold mining stocks.

The previous three paragraphs are obviously only a brief summary of the gold futures story. There is so much more to it from a technical and fundamental perspective and I can lead you to plenty of other online resources that are pro gold and long term bullish on gold.

For now though, to keep on topic, I want to take a quick look at gold futures from the technical side.

What is the Current Technical State of Gold Futures?

Making a determination about the health of any market index on an intermediate and longer term basis is crucial. Why? Because you never want to find yourself fighting a longer term trend.

Since the lows of 2001, gold futures have made a spectacular upward move that has been both very persistent and very bullish. Technical resistance levels were taken out with signs of strength and confirmed volume. The performance of gold has been spectacular. The performance has been very good, however some may argue a less than stellar performance relative to how it did in the first half decade of the 1970’s. Gold rose from 35 to 200 during the first half of that decade, a 470% move. The present run up in gold futures since 2001 took us from 250 to 450, an 80% move. Clearly, the economic variables are not identical to what they were during the first half of that decade.

For those of you that do not already know, the price of gold moves inversely to the US Dollar. It is basically a battle between the paper dollar and the hard money gold. The chart to the left of this text is a chart of the monthly gold futures continuous contract. Right now this chart to me is very clearly showing that gold futures are at a critical juncture. Why critical? Well because we have what appears to be a monthly MACD crossover to the downside (bearish side). This is occurring after the indicator had based out for about one year. A bearish monthly MACD crossover in my experience is usually not something you should just ignore and pretend does not exist. While it is true that in many cases the MACD on daily, weekly or monthly time frame can give false signals, risk management suggests that you do not ignore a bearish signal when it shows itself, especially when it is of the longer term nature.

Every time I see a bearish or bullish monthly MACD crossover it usually either causes a very high level of bearishness or a very high level of bullishness. Making the determination of whether or not a MACD crossover is a false signal requires analysis on a few other levels including price itself, other indicators and volume as well.

For this analysis, I have to take the stance of extreme caution on the gold futures price based on what appears to be an imminent bearish monthly MACD crossover. I should also point out that even if the gold futures price does a 50% retracement to 350, the whole bull market case can still be intact. So far, from the lows of 2001 to the 52 week highs of 2004, gold futures have done only a 23% retracement. The degree of retracement that occurs will be key in determining the future strength or weakness in this market. Definitely a development worth watching.

The early 1970’s run up in Gold

As you can see in this next chart, the early half the 1970’s run up in gold was much more powerful and persistent than the one we have seen in the early half of 2000’s. But also note that there was a bearish monthly macd crossover in late 1974. That topping process took some time to develop but eventually led to a 50% retracement in the gold price of its entire up move from 1970. This was definitely not the end of that great bull market as gold eventually found support and went on to peak at 800 in 1980.

What is the most bullish scenario gold futures can produce going forward? The most bullish scenario would be a pullback and retest of 410, holding that support level and then only going into a sideways corrective action. That would only be a 23.6% correction and imply significant internal strength in the gold futures market and eventually more bullish outcome. At the present time I do not believe that this will be the case. It is difficult to say with any level of confidence if this more bullish case will materialize. The first road sign we need is a retest of the 410 level.

Following the gold futures market will definitely be interesting to watch going forward! I will keep an eye on key levels and make comments as developments warrant.

Peace.

tc

P.S. My next post is going to be about the inverse of Gold. Cool eh?