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Gold Price Jumps: Dead Cat Bounce Or Final Bottom?

Posted
4/5/2013 7:19:00 PM
By: Investor's Business Daily
Referenced Stocks:COT;GDX;GLD;SPY;UUP

Gold prices bounced off an 11-month low Friday, paring the week's heavy loss that came despite a weakening dollar and Japan announcing an epic economic stimulus plan. Technical and investor sentiment indicators suggest the yellow metal has formed a significant bottom and is due for an oversold bounce at least.

Gold futures prices surged 1.63% to $1,580 an ounce.

SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, bounded 1.67% to 152.80 in heavy volume in the stock market today . It ended the week down 1.08%. It's very close to its 2011 and 2012 lows of 148 and change.

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, fell 0.17% Friday to 22.45. For the week, it lost 0.66%.

Market Vectors Gold Miners ETF ( GDX ) lost 0.45% Friday and plunged 7.37% for the week to end at 35.08 -- its lowest price in nearly four years.

The chart pattern and extremely bearish sentiment in gold presents a strong contrarian investing opportunity, says Mark Arbeter, chief technical strategist at S&P Capital IQ.

"One investment poll recently show(ed) a lower percentage of bulls than what was seen in 2008, a period when prices fell from above $1,000 an ounce to near $700 an ounce," Arbeter wrote in his weekly technical report Friday. "The Commitment of Traders ( COT ) shows smart money, or commercial hedgers, positioned for higher prices, while dumb money, or large and small speculators, is positioned for lower prices. This combination has many times led to a strong intermediate-term rally."

Gold is very oversold and a relative strength indicator that Arbeter uses shows a bullish divergence for the first time since May and June of 2012, when gold formed a major bottom, he wrote. The gold chart shows major buying support at $1,525 an ounce, but a break below that level could send gold freefalling.

If gold breaks below $1,525 an ounce, it will likely fall to $1,250, says Harry Dent, founder of HS Dent, an economic research firm based in Tampa, Fla.

"Gold should be rallying with strong QE (quantitative easing) in the U.S. followed by Japan," Dent said in an email. "But it has been fighting weaker world demand, especially from India and China, and a stronger dollar. That could suddenly shift as the dollar reversed sharply today, and we could see a race to devalue currencies through QE that is being fanned most by Japan."

Gold prices have tumbled 12% below their 52-week high. While that doesn't meet the 20% dive that signifies a bear market, it has fallen below both its 50- and 200-day moving averages, which is very bearish.

Further weakness in stock prices globally and especially in the U.S. will draw investors back into gold, says Adrian Day, founder of Adrian Day Asset Management in Annapolis, Md. Investors are only holding back on gold because of the strong dollar, he believes.

This weekSPDR S&P 500 ETF ( SPY ) pulled back 1% from its 52-week high.IShares MSCI EAFE Index (EFA), tracking foreign developed markets, eased 2% from its high, whileiShares MSCI Emerging Markets Index (EEM) corrected 8%.

Gold has failed to rise despite massive money printing by major central banks because it's just sitting on banks' balances sheets instead of being lent out, says Terry Sacka, chief strategist at Cornerstone Asset metals in Palm Beach Gardens, Fla.

"Gold will rise when the velocity of money hits the street; we are still pouring money into the banking system pit and have yet to really see the velocity of money move into the real economy," he said in an email.

As prices fall, people in emerging markets and central banks are loading up on bullion, he says.

"Gold is still being purchased aggressively by global central banks while printing money out the front door," Sacka wrote. "Russia bought 600 tons last year and is still aggressively buying."

Expectations of foreign central banks buying gold owing to a loss of faith in U.S. Treasuries "turns out to have been wildly overwrought," says David Goldman, founder of Macrostrategy.com. Central bank gold holdings increased merely 2% last year, he wrote in a client note Thursday citing data from the World Gold Council.

Foreign demand for U.S. Treasuries will likely increase this year as regulators gradually enforce rules for liquidity and central banks around the world engage in quantitative easing programs.

"With the United States poised to overtake Saudi Arabia as the world's largest oil producer by 2020, the U.S. current account deficit is likely to settle in the 2% range, down from the 6% range during the mid-2000s," Goldman wrote. "That will enhance America's capacity to borrow overseas by reducing the risk of future dollar depreciation."

"That is why forecasts of fiscal doom, for example David Stockman's widely circulated essay last week, should be ignored for the time being," Goldman added. "In the long run, to be sure, America cannot sustain its entitlement burden. But the U.S. should be able to manage its debt issues comfortably for the next several years."

Silver Prices

Silver futures prices climbed 1.45% to $27.39 an ounce.

IShares Silver Trust (SLV) popped 1.54% to 26.39 Friday. For the week, it lost 3.8% and reached a nine-month low.

Global X Silver Miners ETF (SIL) added 0.88% Friday to 17.19. It skidded 5.3% for the week and touched an 11-month low.

Follow Trang Ho on Twitter @TrangHoETFs .