Gold is a well known hedge against a declining USD. It can also be a non-correlated asset to the market. Not negatively correlated. Non-correlated. Please see my recent Technical Analysis course – to understand the difference. As such, gold isn’t such a bad thing if you are a bit worried about potential stock volatility. Finally, it is a commodity – thus may have some inflation hedging properties. However, because gold is less of an industrial material, its actually not quite as effective as an inflation hedge as some believe. Whatever the case, I’ve noted some potential positives in the gold chart below for those who wish to consider holding it as a diversification factor based on all of the above factors.
“There’s a bigger buy-in this time to the idea that prices never decline, and that all you have do is buy, than there has ever been. When the decline comes, it will perhaps be bigger and better than anything previously in US history.” Jeremey Grantham
The chart below is a busy one. I tend to keep my historic drawings on charts so I can eyeball old support resistance lines, and note my thoughts on an historical basis to keep myself in check. Today, I want you to stricly focus on the right hand side of the gold chart below. There you will see a few things:
- After a parabolic rise and overbought signal in early 2020, gold declined and entered into a consolidation pattern.
- Despite the declining peaks and flat bottom of this right-angled triangular consolidation, we might note the rising momentum indicators.
- All three time frames (short, medium and longer termed) oscillators are diverging bullishly. Note my red arrows on the indicators.
Below is the Equity clock seasonal gold performance in relationship to the S&P 500. As you can see, we have entered into a period of traditional outperformance by gold. This chart is a relative score, not an absolute return score, so keep that in mind. If the SPX goes down, gold might go down less. Visa versa if the SPX goes up. Gold might go up more. Nothing prevents gold from moving higher after the March peak-performance date. Again, this is a relative study.
Gold has an encouraging technical profile right now, although it needs to break out of the triangle noted above to confirm a bullish move. Meanwhile, seasonals are certainly encouraging. And, then there’s that stock market volatility of late….
Food for thought as a diversification potential for a portfolio.
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