Is Now the Time to Ditch Gold or Buy More?

Is Now the Time to Ditch Gold or Buy More? image 200613 PC leongTime to Ditch Gold or Buy MoreAs many of you know, I’m not keen on the near-term prospects for gold at this juncture. The metal, while still viewed as a safe haven for some, is no longer on my buy list.

Yes, central banks are buying gold, but so what? The supply of the yellow ore continues to be ample, and demand really doesn’t appear to be doing anything.

In mid-April, I was bearish on gold when it traded at around $1,480–$1,500 an ounce. (Read “Is Gold’s Near-Death Crisis Over-Exaggerated? Concerns of a Market Meltdown May Not Be.”) And here we are two months later and the spot price is down 6.5%, while the S&P 500 has gone up about 3.7% during the same time.

Now I’m not saying that I would never be a buyer; I just wouldn’t be buying at this time, due to tough resistance and selling on upside moves, based on my technical analysis.

Take a look at the chart below. The first thing you’ll notice is the presence of a firm bearish “death cross” since late February, when the 50-day moving average (as shown by the blue line) crossed below the 200-day moving average (as reflected by the red line). Since the initial move, the gap between the two moving averages has widened and gold prices are trending lower.

Is Now the Time to Ditch Gold or Buy More? image Gold ChartGold Chart

Chart courtesy of www.StockCharts.com

The next developments you will notice on the chart above are the two successive descending triangles characterized by lower subsequent highs.

The first descending triangle materialized between early February and early April, prior to gold tanking on the chart, falling below $1,350. We are now in the second descending triangle with support around $1,350. Failure to rally and hold could result in another sell-off.

Again, take a look at the Gold Bugs Index, comprising a basket of unhedged gold stocks; this is why this index is such a good indicator of the movement of prices due to the lack of hedging.

Is Now the Time to Ditch Gold or Buy More? image Gold Bugs Index ChartGold Bugs Index Chart

Chart courtesy of www.StockCharts.com

The picture for the yellow metal doesn’t look favorable. In April, Goldman Sachs advised shorting the metal and mentioned the $1,200 level. (Source: Cosgrave, J., “The Scary Number for Gold Investors: $1200,” CNBC, April 15, 2013, last accessed June 19, 2013.)

Gold at $1,200 is realistic but, of course, if inflation begins to creep higher, we could see a rally. At this stage, inflation is benign and a non-issue.

There is clearly more downside risk. Gold could rally back above $1,400, but I doubt it would hold. I would look at a rally as an opportunity to sell.

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