Monday, November 23, 2009

For Gold, Overbought Means Overgood

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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Gold hit another record high this morning. After closing at $1151.90 (up $6.30) at 5:15PM in New York on Friday, spot gold began rallying in Hong Kong and Sydney trading Sunday night. Shortly after trading began Monday in New York, gold reached $1171.60. Spot silver traded as high as $18.93, above its highest price last week. This is the seventh day in a row that gold has traded higher. Gold rose last Friday, even though the U.S. dollar was rallying.

COMEX December futures expire next Monday, November 30th. There is a lot of talk about the $1200 price point acting as a magnet at the expiration. It may indeed happen, but the ETF GLD has become overbought on the daily charts as of today after gapping up strongly (the price will have to trade down into the blank area of that gap at some point). GLD will hit overbought levels this week on the weekly charts as well. Some give back in price is going to be necessary soon. It may wait until after the first few trading days of December however. SLV stayed overbought on the daily charts and continued rallying for two weeks this September before there was any significant price decline.

GLD itself became overbought on the daily charts and rallied for two weeks also in September of 2007. This was at the beginning of the gold rally that lasted until March 2008. That rally had a midway pause (referred to as a high tight flag by technicians) approximately 7 weeks after GLD first became overbought on the dailies. However, the midway peak began about 1 week after gold became overbought on the weekly charts (four months before the rally ended). Since the overbought conditions are taking place coincidentally this time, we can get the midway pause for the rally starting anywhere from early December to the second week in January. Once this takes place, you can double the amount of rally from $1033 that has preceded it to get an approximation of the coming peak in spring 2010.

The silver ETF SLV has different technical patterns that does GLD. On the weekly charts, SLV isn't even remotely overbought and if silver kept on going straight up it would take approximately two more months before this could happen. A pause with some retracement and it could be another four or five months. A strong overbought condition on the weekly charts was the end of the SLV rally in March 2008. As for the daily charts SLV was overbought in February, late June and September of this year. Each overbought condition caused a temporary peak and SLV then traded higher later on. SLV still has a way to go before being overbought again on the daily charts. Look for this to happen. It will likely mark the beginning of the mid-rally pause for both silver and gold.

Disclosure: Long gold and silver

NEXT: When the Invisible Hand is the Government

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.