MARKETS SPECTATOR: Golden fling

After rising 12.5 per cent from its mid-August lows, gold now looks to be setting itself up for somewhat of a pullback. The weekly chart below from Citigroup shows that the gold market looks to have run into selling pressure around the $US1790/oz resistance level, which marked the previous high seen in February of this year. There's no doubting the precious metal is overextended in the short term and is due for some decent profit taking. As noted by Citigroup, it believes a pullback towards around the $US1665 - $US1670/oz level could be in store.


Source - Citigroup


Source – Stockcharts.com

Historically, gold has traded like a safe haven asset, typically having a negative correlation to risk assets like equities (S&P 500). However, as you can see in the above chart this has largely not been the case since the US Federal Reserve announced that first quantitative easing package in November 2008.

Since then, the breakdown in this correlation has been due to the declining value of the US dollar, thanks to QE1, 2 and now 3. This boosts US dollar denominated assets (gold) as well as future inflationary expectations, which gold is a hedge against. On top of this, the loose monetary policy stimulates the economy, in turn boosting the stock market. Hence, the positive correlation between gold and S&P 500 nowadays.

So the question is whether we are just witnessing the start of a healthy bull market pullback, in both gold and the S&P 500 or if it is the start of something bigger.


Source – EquityClock.com

If the above 20 year seasonal chart of gold is anything to go by, it should be a healthy pullback. Almost on cue, we can see that gold typically undergoes a correction towards the end of September through to mid / late October. From there, gold historically moves into its strongest months of the year.

If this plays out and gold follows the script, then given the recent correlation between gold and equities (S&P 500) we could concur that the current moves lower is merely a pullback in a bull market. That, of course is if the current correlations remain.