by
D. R. Barton, Jr.
We’re going to take a break from our volatility series to take a closer look at two markets: bonds and gold.
One has reached bubble proportions— with bonds attaining unsustainable price levels. And in the other one, the gold bugs are starting to whisper quite loudly, “I told you so,” perhaps a bit prematurely.
With the FOMC announcing a monstrous rate cut to unchartered levels, the financial markets have entered yet another era of completely unprecedented existence. While the Fed hasn’t shot its last bullet, it certainly needs a microscope to find its remaining ammo.
And with the Fed Funds rate all but disappearing below single digits, bond prices have absolutely exploded. By any measure, they have made an asymptotic move.
Markets can remain overbought for longer than we expect, but the correction in bonds will most certainly be a violent one when it comes.
Gold on a Run, But It’s Far from a Bull
Meanwhile, gold has been on a short-term tear, gaining $100 per ounce in just two trading weeks. While gold’s relationship to the dollar has improved quite a bit over the short run, its climb relative to crude oil has been absolutely dizzying.
A mere six months ago, an ounce of gold would buy a scant 6.6 barrels of crude oil. With oil’s recent plunge and gold’s strengthening price, that ratio has almost tripled! An ounce of gold currently buys 18 barrels of oil – the highest level since early 1999!
So gold’s strength relative to other weakening commodity prices is impressive. And yes, massive amounts of paper money have been printed and more will have to be printed to make good on the non-stop promises made by (most notably) the U.S. government, as well as others around the globe. Fundamentally, gold certainly wins the “most likely to appreciate to new highs never seen before” award. The gold bugs shout it from every blog. But just when it will reach those lofty heights is far from certain. There is one inescapable fact standing in the way of gold’s coronation – gold is decidedly in a bear market! Before you call for my head on a platter, let’s look at the facts (as represented by price).
The classic and purest definition of a downtrend is a market that is making lower highs and lower lows. And clearly gold’s movement fits that definition to a tee over the past nine months.
There are no fewer than three obstacles in the way of gold moving from “having a nice up move in a bear market” to “bullish shiny metal”:
1. It has to make a few closes above the 200 day moving average for the first time since July. The descending 200 MA is not very far away.
2. It needs to break the downtrend line that is currently at ~900.
3. It needs to make a higher high, above the last one set at 938.50.
When we get all of that done, then we can talk about $2,000 gold. Until then, it’s just another bear market with loads of potential.
Great Trading,
D. R.
About D.R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at “drbarton” at “iitm.com”.
http://www.iitm.com/Weekly_update/Weekly_403_Dec_17_2008.htm
