Is Gold Getting Too Much Media Attention?
Source: Clif Droke (9/13/10)
"Gold once again finds itself in the investment spotlight."
Crowd sentiment on gold and the gold stocks is, obviously, running high; but I don't get the sense it has reached the dangerously high proportions seen at major tops. The number of articles dedicated to the yellow metal in mainstream news publications has increased in recent weeks. At minimum, this is a sign that investors should exercise caution on the near-term trend, using the favorable publicity gold garners as a warning to tighten up stop losses on existing long positions.
Some analysts are going so far as to put a "sell" on the yellow metal due its recent surge in popularity. To get a contrarian sell signal, we'd have to see outrageous levels of excitement over gold and gold stocks and a nearly linear or parabolic rise in price. We'd also expect to see something that has accompanied virtually every significant market top in recent years, which is when full color pictures of the lustrous metal are seen adorning the front pages of magazines and newspapers. The closest we've seen to this recently is the August 30 cover of Business Week, which featured the face of billionaire financier Thomas Kaplan against a gold colored backdrop, headlined "The Gold Digger." The article was in reference to Kaplan's search for gold in Romania. This skirts the edge of the "gold cover" indicator but doesn't quite qualify for it, IMO.
Another close call occurred in last weekend's edition of The Wall Street Journal. On the front page of its finance section was the headline: As Gold Climbs, So Do the Deals. It was accompanied by a full-color picture of the Eureka West vein outcrop at Andean Resources' Cerro Negro gold exploration project. The article was itself a preliminary warning of a market top, which is likely forming; but I wouldn't call it a deal breaker as far as sending a contrarian sell signal. The article described the trend of the larger gold producers on the move in search of attractive junior resource companies to acquire.
Already there have been a couple of high-profile deals involving Goldcorp's announcement that it would buy Andean Resources and Kinross Gold's purchase of Red Back Mining. Such deals tend to occur as a market top approaches but aren't, in themselves, guarantors of an imminent reversal of trend. What you have to watch for, to indicate the top is near, is when the penny junior mining stocks start taking off in euphoric two–three day rally bursts—many of these rallies for no reason. This tells you that the speculative element has entered the market in full force and that a top beckons.
The single-biggest factor behind gold's latest rise isn't speculative fervor or excessive greed—elements commonly seen at the conclusion of a major uptrend—nor is the motive force a mere seasonal factor. Instead, the driving force behind gold's uptrend is the general concern—if not outright fear—over the economic outlook. As Matt Whittaker wrote in a recent Barron's column: "Right now, people want gold because they're uneasy. True, they aren't as scared as they were in June about the European debt crisis, and they are less fearful of systemic collapse than during the financial crisis of 2008. Nowadays, it is a slow, simmering fear of prolonged anemic global economic growth." Gold has been one of the best plays against the turbulence and uncertainty of 2010 and will likely continue to be as long as the employment rate and other key economic numbers remain weak.
Regardless of whether gold is near a top or not, one thing that must be said in its favor is that because of its long-term forward momentum, gold trading is ideally suited for trendline trading. If ever there was a better advertisement for the immediate-term trendline method of trading it would have to be found in the gold price of the last few months. The trendline breakout in early August allowed investors to ride the uptrend from $1,200 all the way up to $1,260 in the last month without any significant volatility along the way. Using trendline breaks for entry and exit signals has been the simplest and most effective way to participate in the interim trading range in gold that has been underway since May.
Silver Trading Techniques
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Clif Droke is the editor of Gold Strategies Review, providing forecasts and analysis of the leading North American small-cap, mid-tier and senior mining stocks from a short- and intermediate-term technical standpoint since 1998. He is also the author of numerous books, including most recently, The Stock Market Cycles. For more information, visit www.clifdroke.com.