Gold Lacks Intrinsic Strength
by Carl Swenlin
May 29, 2009
A few days ago my friend, Tom McClellan (www.mcoscillator.com),wrote a piece about how the GolDollar Index reflects very low internalstrength in gold, even though gold is approaching all-time highs. WithTom's reminder, I thought I should offer my perspective on this event(with my apologies for any overlap).
The GolDollar Index was invented by Tom McClellan, and is calculatedby multiplying the price of gold by the U.S. Dollar Index. (We dividethe result by 10 to keep the numbers from getting too big.) Its purposeis to cancel the effects of currency fluctuations on the price of gold.By comparing it with the spot gold index we can determine if there isinherent strength/weakness in the price of gold.
For example, all things being equal, if the dollar is falling, goldshould rise at a proportionate rate. If gold is rising at a fasterrate, it means that some factor (supply and demand) is giving gold ahigher relative strength.
This inverse relationship is by no means iron-clad. For example,from the lows in November 2008, both the dollar and gold rose more orless together, causing the GolDollar Index to move to all-time highs,and reflecting overpowering demand for gold.
The inverse relationship between gold and the dollar was restored atabout the end of April, and you can see that the dollar and gold arenow clearly moving in opposite directions. The problem, which TomMcClellan pointed out, is that the GolDollar Index is rising at a veryshallow angle, reflecting that gold's intrinsic strength is currentlyquite low. At least gold is still rising and benefiting from thedollar's weakness.
Bottom Line: The immediate problem with this situation is that goldis approaching major resistance at $1,000, a level from which it hasbeen turned back twice before. The weakness reflected by the GolDollarIndex implies that gold may be turned back a third time. Another way tolook at it is that gold is simply digesting the huge surge of demand itexperienced between November and March, and that higher demand couldmaterialize if the $1,000 level is penetrated.
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Carl: Do divergences in the oscillators such as the OBV set or the ITBM(V) set have importance? Or are divergences in the PMO the only divergence that matter?
ANSWER: A bullish divergence is when the price index makes a lower bottom at the same time an indicator makes a higher bottom. A bearish divergence is when the price index makes a higher top at the same time an indicator makes a lower top.
In general, a divergence on any indicator qualifies for attention. More important to remember is that bearish divergences are less reliable predictors in a bull market, and bullish divergences are less reliable in a bear market.
Carl
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MECHANICAL MODELS
We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.
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Technical analysis is a windsock, not a crystal ball.Be prepared to adjust your tactics and strategy if conditions change.
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2008 TIMERDIGEST RANKINGS FOR DECISION POINT #17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs.SPX 61.51) #4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26) #5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61) #9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69) #2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36) #2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23) #3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48) 2007 TIMERDIGEST RANKINGS FOR DECISION POINT #40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX103.28) #5 Bond Timer (TD Index: 105.85 Bonds 104.39) #2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX117.63) 2006 TIMERDIGEST RANKINGS FOR DECISION POINT #11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs.SPX 113.6) #3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46) 2000 TIMERDIGEST GOLD TIMER of the YEAR *All timers are assigned an Index of 100 at the beginning of the year.The amount above or below the starting index indicates the percentagegain or loss for the year. Beginning in 2006 we began using mechanical models -- theTrend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/TrendModel for Intermediate-Term Stocks. Prior to 2006 we used discretionarysignals. |
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BIO: Carl Swenlin is a self-taught technical analyst, who hasbeen involved in market analysis since 1981. A pioneer in the creationof online technical resources, he is president and founder of
