Gold bubble bursts


The action in world markets last week took many markets down, of course, but especially hard hit was the gold market. I’ve been suggesting that this market has been in a bubble for some time. Bubbles do tend to grow larger than anyone expects, and this one certainly exceeded the expectations of all but those who are constantly and annoyingly hawking gold coins. It would seem that the news from last week would have caused a further upward move in the price of gold. We are all told that this is the place to be when there is a crisis, especially one involving debt and currencies. Maybe the market had already discounted the worst. This market was certainly ripe for a rout. One thing I had been keeping my eye on was the reluctance of the gold mining stocks to participate in the meteoric rise in the underlying asset. But recently the gold miners were starting to come to life. But it wasn’t to last. When the stock markets around the world started to unravel, gold joined the party. It is probable that large traders and hedge funds were overcommitted to gold (duh?) and there was likely liquidation in profitable assets to cover loses in the losers. Sometimes it doesn’t take much to pop a bubble, and once popped the air comes out quickly. Silver was hit even harder.

But what about technicals? The above chart is of the weekly etf of gold. I like to use the GLD etf to avoid having to create a continous contract of the futures. The GLD is close enough. You can see blue moving averages have remained bullish through the entire chart, and that whenever prices approached the blue line that a good entry point on the long side presented itself. We are once again sitting on that blue line. However, the last weekly candle is perhaps too large to expect support to hold. The middle indicator is the double stochastic and it defines cycles fairly well. Upturns from oversold, or the lower dashed line, represented good long entries. I use this only to enter in the direction of the trend. However, sometimes will use the overbought readings above the upper dashed line to exit, especially after a break of the upper dashed line. The lower indicator is the adaptive CCI. It has stayed above the zero line for the entire chart. When it is above the plus 100 line, which is the line that the indicator is still holding above, this suggests that the trend is strong. However, when the indicator crosses above the plus 200 line, which is the upper dark cyan line, prices are usually extended and ripe for either a pullback or a pause in the uptrend.

It would be very bullish in my interpretation of the gold market if that blue support line were to hold and then the cycle (middle indicator) were to turn up along with the CCI remaining positive. I really don’t expect this to happen because of the severity of the decline. It seems that the bubble still has more air to let out, but that’s just a feeling. Until the uptrend as been structurally broken on this chart, I’ll still trade from the long side, even though I would rather from gut feel be on the short side. I’ve learned not to trade against the trend, and that is still up according to the weekly chart, despite the huge drop last week.