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A Sign of Trouble Ahead for Gold

By Jeff Clark
Thursday, August 18, 2011

Remember how much fun silver was back in April? It was nothing but upside, one glorious rally after another. Silver investors were making piles of money and it seemed like the fun would never end.
Of course, that's usually when the fun does end. Silver peaked at $48 per ounce at the end of April. Then it collapsed 30% over the next two weeks.
There were plenty of caution flags warning of silver's impending decline. We warned you about that here.
Today, those same caution flags are waving over the gold market.
Okay... let's get the basic understanding out of the way. Yes, I realize the dollar is doomed and gold is going to something like $10 bazillion per ounce over the long term. So are silver, platinum, palladium, copper, diamonds, barrels of oil, acres of farmland... and my grandmother's antique lace doilies.
I get it. Please don't waste your time trying to convince me gold is going to the moon. I agree. Over the long term, gold is going much higher.
As a trader, however, my job is to profit on short-term moves. And in the short term, gold is vulnerable to a sharp decline. Let me explain...
Gold investors have enjoyed a terrific run over the past few weeks. While financial markets around the globe were melting down, gold was bubbling up. The precious yellow metal is up 20% (or $300 per ounce) since early July. Check out this chart...
It has been a lot of fun for gold investors – nothing but higher prices, day after day.
But wait... Before we get too carried away, take a look at the silver chart from earlier this year...
Notice the parabolic move on the silver chart, the brief decline, and the quick rally to new highs. Go back and take a look at the gold chart. Notice how it's showing a similar pattern?
Now, take a look at what happened next for silver...
Gold has had a terrific summer. But, like silver in the springtime, the gains look like too much, too soon. The metal is in need of a rest.
The best case gold investors can hope for is the metal could hang out here near $1,800 for a while and consolidate its recent gains. The worst case is gold could be headed for a nasty correction.
Either way, if you're looking to buy gold, you'll likely get a safer entry level a few months from now.
Best regards and good trading,
Jeff Clark

Further Reading:

"The best case is the metal could hang out here for a while and give the 200-DMA a chance to rise up closer to the current price," Jeff wrote of silver in April. "The worst case is silver could be headed for a nasty correction." Sound familiar? Find out how he realized gold's cheaper cousin needed a breather here: The Curse of the Silver Trade.
Though he's cautious now, six weeks ago Jeff told Growth Stock Wire readers that gold stocks were ready for a big rally. At the time, he wrote that gold stocks' conditions made "owning them right now one of the best risk/reward trades in the market." He nailed it. Gold stocks are up 20% since July 1.

In The Daily Crux
Market Notes
Big U.S. dollar fund UUP sitting just 0.5% from an all-time low.
Gold miner fund GDX hits a fresh three-month high.
Investor panic is starting to pass... fear index "VIX" falls 35% from last week's highs.
Electric car battery maker Ener1 is down 90% in the past six months... bankruptcy rumors are swirling.
Market Watch
Symbol Price
S&P 500 1193.89 +0.1% +9.3%
Oil (USO) 34.01 +0.5% +0.4%
Gold (GLD) 174.42 +0.3% +45.7%
Silver (SLV) 39.33 +0.8% +117.1%
U.S. Dollar 73.96 +0.1% -10.1%
Euro 1.44 +0.2% +12.1%
Volatility (^VIX) 31.58 -3.9% +29.8%
Gold Stocks (^HUI) 578.12 +0.9% +24.1%
10-Year Yield 2.16 -2.3% -18.2%

World ETFs
Symbol Price
S. Korea (EWY) 56.21 +1.4% +15.1%
Canada (EWC) 29.44 +0.6% +13.2%
S. Africa (EZA) 65.34 +1.3% +12.4%
USA (SPY) 119.67 +0.1% +11.4%
Singapore (EWS) 12.91 -0.2% +10.9%
Taiwan (EWT) 13.61 +0.1% +9.7%
Japan (EWJ) 9.86 +0.1% +4.8%
Israel (ISL) 15.29 -0.4% +3.7%
Lat.America (ILF) 45.83 +1.6% +0.1%
Russia (TRF) 17.99 +0.3% -3.5%
China (FXI) 37.67 -0.4% -5.9%
India (IFN) 27.23 +0.3% -8.5%

Sector ETFs
Symbol Price
Oil Service (OIH) 134.69 +0.8% +30.0%
Internet (HHH) 71.39 -0.7% +28.6%
Big Tech (QQQQ) 53.58 -0.6% +19.0%
Consumer Svcs (IYC) 66.20 -0.2% +18.0%
Retail (PMR) 18.68 -1.7% +17.3%
Basic Mat (IYM) 68.52 +0.0% +14.6%
Real Estate (IYR) 56.50 +0.1% +13.7%
Semis (PSI) 13.61 +0.0% +12.3%
Media (PBS) 12.82 +0.3% +11.7%
Health Care (IYH) 66.26 -0.1% +11.1%
Big Pharma (PPH) 65.81 +0.3% +11.0%
Telecom (IYZ) 22.03 +1.2% +11.0%
Utilities (XLU) 32.98 +0.7% +11.0%
Industrials (IYJ) 58.97 -0.4% +8.9%
Transportation (IYT) 82.29 -0.6% +7.2%
Water (PHO) 16.46 -0.2% +6.3%
Software (PSJ) 21.80 -1.4% +5.8%
Biotech (PBE) 18.95 -0.4% +2.7%
Defense (PPA) 16.84 +0.0% +1.9%
Insurance (PIC) 14.45 +0.0% +1.1%
Construction (PKB) 10.95 -0.8% +1.0%
Financials (IYF) 48.53 +0.4% -3.7%
Nanotech (PXN) 7.14 -1.5% -15.0%
Alt. Energy (PBW) 7.13 -1.5% -20.1%

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