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Encouraging Action for Gold Bulls

Wed, Apr 23 2008, 09:06 GMT
by Chip Hanlon

Delta Global Advisors, Inc.

When discussing gold and commodities on CNBC last month, I said I expected gold to underperform commodities such as energy, base metals and agriculture for a period of time. While that scenario has played out and will likely continue to for a little while longer, gold bugs should be encouraged by how the precious metal has performed in recent weeks; while gold was quite overbought on a short-term basis a month ago, it has very quickly moved to a less overbought state while giving back only about 10% of its price as we speak. That’s bull market action.

Now, this correction could go on awhile longer and I don’t consider a downside target between $800-$850 to be out of the question, but we may only end up seeing a time (sideways) correction in gold much without much more downside in terms of price. 3-year chart of gold:

As you can see, a case could be made that gold recently looked as overbought as it did at its last important intermediate peak in 2006—although for a number of reasons I don’t consider its recent peak to have been as extreme as that last one—but even if so, it is reasonable to think that most of the price damage that’s going to be done to gold in this correction has already occurred.

At the same time, look at the U.S dollar:

While gold was starting its correction a month ago, the U.S. dollar was very well set up for an oversold rally. What has happened, though? The Greenback has become much less oversold without going anywhere—this should strike any dollar bull as worrisome, weak action. Maybe it will start to get going to the upside from here, but it better do so in a hurry else a break to new lows is likely to result soon.

Should someone without precious metals exposure go piling headlong into a holding like GLD today based on this snapshot? I wouldn’t think so, but those looking to average in over time can start doing so much more comfortably than they could have just a month ago.

Published on  Wed, Apr 23 2008, 09:14 GMT