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Gold Lacks Intrinsic Strength
by Carl Swenlin
May 29, 2009
A few days ago my friend, Tom McClellan (www.mcoscillator.com), wrote a piece about how the GolDollar Index reflects very low internal strength in gold, even though gold is approaching all-time highs. With Tom's reminder, I thought I should offer my perspective on this event (with my apologies for any overlap).
The GolDollar Index was invented by Tom McClellan, and is calculated by multiplying the price of gold by the U.S. Dollar Index. (We divide the result by 10 to keep the numbers from getting too big.) Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold.
For example, all things being equal, if the dollar is falling, gold should rise at a proportionate rate. If gold is rising at a faster rate, it means that some factor (supply and demand) is giving gold a higher relative strength.
This inverse relationship is by no means iron-clad. For example, from the lows in November 2008, both the dollar and gold rose more or less together, causing the GolDollar Index to move to all-time highs, and reflecting overpowering demand for gold.
The inverse relationship between gold and the dollar was restored at about the end of April, and you can see that the dollar and gold are now clearly moving in opposite directions. The problem, which Tom McClellan pointed out, is that the GolDollar Index is rising at a very shallow angle, reflecting that gold's intrinsic strength is currently quite low. At least gold is still rising and benefiting from the dollar's weakness.
Bottom Line: The immediate problem with this situation is that gold is approaching major resistance at $1,000, a level from which it has been turned back twice before. The weakness reflected by the GolDollar Index implies that gold may be turned back a third time. Another way to look at it is that gold is simply digesting the huge surge of demand it experienced between November and March, and that higher demand could materialize if the $1,000 level is penetrated.
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Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
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2008 TIMER DIGEST RANKINGS FOR DECISION POINT
#17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT
#40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT
#11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year.
Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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