Thursday, August 18, 2011

Could Gold Soon Go Ballistic?
Gold and commodities work in the exact opposite manner to stocks. They bottom gradually and make spike tops, whereas stocks tend to make spike lows and usually top out gradually. The reason for this difference in behavior is that the same emotion that drives rising commodity prices also drives falling stock prices: fear.

In stocks we often observe that when the market is very oversold but fails to bounce in spite of that condition, a crash or a mini-crash can happen – as was in fact recently demonstrated. The opposite can happen in gold and commodities -  an overbought condition can lead to an upside blow-off.

We note that the gold market has been overbought for quite some time, but so far has refused to correct. Of course a short term correction remains the higher probability bet, however, one must be alive to the possibility that the recent persistent overbought state could also be the precursor to a blow-off move.
Recall for instance what happened with silver late last year and early this year  – from the point where it exhibited a strong and persistent overbought condition for the first time, it proceeded to almost double in price following a very brief, but hefty shake-out. Again, we are not predicting that the same will happen with gold here and now. We can not know that, and it is the lower probability outcome as mentioned above, but the fact that gold has remained persistently overbought for over three weeks now is a hint that something unexpected could happen.

No comments:

Post a Comment