Gold Breaking Out – Ready to Reach for New Highs?

posted by Nima

September 2, 2009 · Posted in Investing 

Action in Gold

There was some noticeable action in gold today. Some say it is just another irrelevant noise, others are calling for new highs.

I have been saying for quite a while that I think gold will do well as soon as people return to the world of reality, and deflation, deleveraging, and credit contraction show their impacts on the markets once again. Whether we are headed that way now or later is still open, but I happen to believe that we are approaching a turnaround.

The action in GLD today makes a breakout a possibility:

gld
Click on image to enlarge.

The HUI index continues to hold the line, the upward move I expected in July did occur, and it also happens to have initiated a breakout out of a triangle now:

hui
Click on image to enlarge.

If the stock market rally is over, and stocks and other commodities are headed for new lows, I expect gold and gold mining to do well. If it is not that time yet, then today’s action may indeed just have been irrelevant noise.

Treasurys

… and what is a well thought out deflation trade without considering Treasury Notes/Bonds. I have been following the trading range in Treasurys for quite a while now and everything has played out as expected so far.

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Today’s action in gold was beautifully complemented by corresponding action in Treasury yields which dropped by 8 basis points to close at 3.29%, a recent July low. If it breaks, the way down is more or less open:

10-year-treasury-2009-september-02
Click on image to enlarge.

Again, all this ultimately depends on fundamentals. Just as gold, Treasurys will only continue to rally when stocks fall. In addition to that, the dollar rally I am expecting would need to start playing out in order to complete the deflation trade.

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