Time to get bullish on gold?

During the last months we have seen the Dow, Nasdaq and the S&P 500 in a rally mode opposed to the commodity and precious metals complex.

• Are we standing in front of a short term rebound for the natural resources sector as the 3 major US indexes seems to lose momentum?

Watching this 4 months daily chart for gold (see figure 1), it seems that we stand in front of a major break out for gold.

Figure 1: Daily chart of the spot price of gold during the last 4 months

But what about the gold stocks? How is the HUI and XAU index doing? do we have a confirmation there?

Figure 2: Technical analysis of the HUI index

For now it seems to be so, as we can see in figure 2, the HUI seems to have formed a bottom during the last weeks with a support on the downside round 285 with resistance on the uppside round 325 and 350 (Fibonacci 61,8% and 50% retracement levels). The 10 days-RSI technical indicator has been oversold (i.e inferior or equal to 30) at the end of september and is now trending uppward, which is a good sign (se figure 2) .

We have also seen some positive divergence between the gold stocks and the spot price of gold, with a gold price going downward and gold stocks (HUI, XAU) consolidating or even pushing higher. This is a fairly bulish signals.

The positive correlation between the price of gold and oil/gas has the potential to counteract the formation of this new positive trend for gold (shown in figure 3).

Figure 3: One year chart of the HUI (blue line) and the XOI (red line) index

Given the fact that the OPEC oil cartel seem having trouble to get along with difficulties to put a floor for oil (reducing the daily oil production by 1,2 million BPD), a follow thrue in this short term downward trend would be rather bearish for gold.

We also keep an eye on the FX-market. The price of gold and the EURUSD have followed each other during the last months (see in figure 4). Negativ news of the US-economi tends to give som strengh to the Euro and appreciate relative to the USD (The EURUSD is going up) which has been the case during the two last weeks.

Figure 4: Daily charts of the spot price gold (top) and the EURUSD (bottom) during the last 3 months

On the momentum side of the equation, the excess of liquidity out there is rotating between sectors. Knowing that, it is of a growing importance to watch what the funds are doing out there. Keep your eyes opened!

Positiv factors for gold in the short term:

• The ability of OPEC to put of floor around $60/barrel in the short term.
• Weakening US-economi (housing market) could boost the EURUSD higher.
• Short term correction to the downside of the US stock market.
• Almost no one is talking about gold & the commodity sector right now (which is positiv if you are like us a "contrarian" type of investor)

Finally, in the short term there is a pretty strong case for gold and the gold stocks to bounce to the uppside. We think that a correction of the Dow, S&P500 and Nasdaq could amplified the magnitude of this bounce.