A one-ounce gold panda coin from China is shown at K. Smaltz Inc. in Garden City, N.Y., in a file photoED BETZ
The Stock
iShares S&P/TSX Global Gold Index Fund (XGD-T)
Yesterday's price $19.87
Trend
Despite three consecutive positive weeks that have encouraged commodity markets, gold stocks have suffered a miserable start to 2010 and may struggle to shake off a downward trend. Gold bugs will scoff at that concern, confident that the crisis that now afflicts the European Union is a harbinger of disaster for the world's reserve currency, too. However, the dislocation of the 2008 financial meltdown showed that in times of stress, capital continues to flow to the United States. And the Greek tragedy playing out in Europe has again primed the greenback.
The U.S. Dollar Index turned Stock Trends Bullish last week, a trend category assigned when the 13-week moving average moves above the 40-week moving average. This signal of dollar recovery was last made in September of 2008, just as the financial crisis started to shake global markets. Coinciding with the U.S. Dollar Index's Bullish Crossover at the time was a new bearish trend in gold - the iShares Comex Gold ETF turned Stock Trends Bearish just when investors might have been most inclined to abandon paper currency for a shiny chunk of mineral.
Although the current euro crisis does not compare to the dangerous financial abyss confronted in the autumn of 2008, investors should be aware of the relative safe haven status of the dollar and its bearish implication for gold and gold stocks.
The Trade
The relative performance of the iShares S&P/TSX Global Gold Index Fund has been dropping since early December when the exchange-traded fund hit a 52-week high. Despite recent strength, it is now down 13 per cent in the past three months compared to the modest 1 per cent gain the recovering S&P/TSX composite index has logged. It's hard not to notice the stock market's worst-performing sector. This moment demands that investors ask the question: Is the sector's immediate prospect better or will the bearish trend drive gold stocks further south?
Stock Trends' analysis is rooted in the premise that trend lines offer both support (for bullish trending stocks) and resistance (for bearish trending stocks). Simply put, once a trend is established, it is difficult for the market to shake its force.
Investors holding the iShares S&P/TSX Global Index Fund or many of the individual large-capitalization gold producer stocks that comprise the index will be doing battle with the 13-week moving average trend line. It now puts a marker near $20.86 on the fund's recent rebound - if the price fails to clear the trend line resistance, the bearish sector sentiment will have shown it has the upper hand.
The Upside
Avoiding losses is a major preoccupation for technical traders. It is the reason for most of their trades and separates them from the typical value investor who is more inclined to weather volatility. As soon as the market starts to send negative signals - like share price movement below the trend line (preferably before) - the directive is to sell in anticipation of further price weakness. Investors mindful of a developing bearish price trend will be exiting the gold sector on the fund's next retreat.
The Downside
If the fund is able to build on recent advances and regains a foothold above $21.50, the bearish gold stock scenario painted here is much less compelling.