Gold: buy, sell or hold?

Gold has been illustrating positive technicals of late. In the near-term, the metal is overbought as illustrated by a few key neartermed momentum indicators. However, the bigger picture suggests some upside. Today, I want to take a look at the gold chart for some clues to neartermed and longer /medium termed direction. I’d also like to re-examine a popular strategy regarding gold’s ability to hedge against a falling US dollar.

OK- lets get this show rolling with a look at the technical profile of gold on a weekly chart. I’ve posted the usual barrage of indicators on this chart- including the longer outlook of cumulative moneyflow (bottom pane, A/D line), the neartermed outlook of moneyflow momentum (top pane, Chalkin’s indicator), and the short, mid-termed and longer termed momentum views via stochastics, RSI, and MACD.

The most important observations I might make here is that gold successfully bounced off of $1700 support, having corrected its overbought technical status from earlier in 2020. This successful test suggests that last years highs of near $2100 will likely be taken out with new highs in a matter of time. Adding to that thought is the extremely bullish crossover on the longer-outlook MACD indicators. Just as it hooked down and bearishly crossed from a meag-overbought level right at the peak of gold’s price in mid-2020 – we are now seeing a hook-up and cross from a mega oversold level. The price action and long termed momentum change illustrated by both the chart and the MACD suggest more good news to come for gold.

That said, the neartermed momentum indicators RSI and stochastics are coming into an overbought level.  That may force a pause in gold’s trajectory. Plus, seasonality for gold tends to be a bit weak over the summer. Thackray’s guides tell us to look for a period of weakness followed by outperformance starting in July.  So, my thoughts lean towards watching for any short termed pullback over the early summer as a potential entry point. We hold one small postion in a precious metals stock – but may add to that position going forward.

Gold as a currency hedge

Most commodities can be inflation hedges – gold included. Gold can also be a hedge against a falling USD. However, the negative correlation between gold and the dollar or inflation is not a hard and fast rule. The chart below (gold is black, USD is red) shows us that – true- most of the time the two are negatively correlated. But the relationship can change at times. And sometimes, the negative correlation is not strong enough to truly offset a loss on the currency.

As you can see on the chart above, gold is beginning to outperform the USD (bottom pane – comparative relative strength). Its relationship is -0.84 negatively correlated to the USD at this moment (where -1.0 is a perfect hedge). All in, I feel that the setup is good for gold, albeit likely a bit weak in the very nearterm.