Monday Morning Musings: Has Gold Lost Its Luster?

The market is flat to slightly higher in early trading on not much news. Once again, it looks like the dollar is driving the action, with the dollar moving higher this morning and that is weighing on commodities.

Gold is getting hit again, now down near $1145. Oil is also trading lower, below the $75 level. Getting back to gold, I wrote over the last few weeks that the pace of the gains in gold was looking unsustainable. That said, its always hard to know when the momentum will stop. As such, I took partial profits in our gold positions, but didn't sell all of it.

A look at the chart below shows how overbought the gold etf (GLD) was. The RSI index at the top of the chart had moved deep into the overbought area, while the distance between the GLD and its 50-day average (blue line) continued to grow larger. Last week, the momentum stopped, and the GLD staged a sharp reversal. You can see below that the volume on that reversal day was enormous. And even now, there is still considerable room for the GLD to continue to correct before it finds support at its 50-day average. This doesn't have to happen, but it would not surprise me.
I don't think that the love affair with gold has ended, its just taking a breather. I suspect that with the public falling in love with gold, the end of the story might look more like a dot.com stock. By that I mean that after this correction and some consolidation, I think the uptrend in gold will resume, and I will likely not sell my entire position until we see that true parabolic spike higher.

The fact that big hedge fund managers like John Paulson and David Einhorn have endorsed the gold trade makes the above scenario more likely, as the public will feel emboldened that they are in the trade with the "smart money".

Outside of gold, the action is fairly subdued. Telecoms and utilities are leading the action, while financials are lagging. This comes despite Bank of America (BAC) raising funds to repay TARP on Friday, and reports this morning that Citigroup (C) is looking to repay $20 billion of TARP funds as well. The WSJ reported that the total cost of TARP could be cut by $200 billion as a result of paybacks. They are now talking about spending this money elsewhere, while they should just pay it back to the taxpayers.

The 10-year yield is down to 3.43%, and the VIX is +4% higher to 22.10.

Trading comment: For all of the handwringing and intraday volatility we have seen lately, the markets have hung in pretty well, and for the most part are consolidating in a sideways fashion. That is typical of this "stair-step" that I have been calling it for the latter half of the year so far. Keep an eye on the sentiment indicators, which have done a good job keeping us in this market. As long as bullishness and complacency don't get too high, I think the market will continue to work its way higher into year-end.

long BAC, GLD