The Price Of Gold In Case Of A Grexit: 2011 vs 2015

This article provides excellent precious metals chart analysis as featured on www.ChartAnalyst.expert and is courtesy of Arthur Hill at StockCharts.com.

There is talk that gold may get a lift because of the situation in Greece and quantitative easing by the European Central Bank (ECB). Even though the ECB was not involved in QE back in 2011, we did have the sovereign debt crisis and gold exploded higher. Can this happen again? First, let’s review the chart from 2011. The first chart shows Spot Gold ($GOLD) hitting a new high in early May and then forming a triangle consolidation. The new high tells us the long-term trend was up and this made the triangle a bullish continuation pattern. A breakout around 1560 signaled a continuation of the uptrend and gold hit 1900 in less than two months.

GOLD_30_December_2011

There are two big takeaways here. First, gold was already in an uptrend and the triangle breakout provided a signal in early July. Wedid not need to know about Europe to see this signal. Second, gold gave it all back as the Dollar advanced from late August to late December. Strength in the Dollar ultimately weighed on gold. Note that the European sovereign debt crisis was in full swing in July-August 2011. The indicator window shows the S&P 500 falling sharply in late July and early August. The Dollar Index was surprisingly flat from May to August and did not rise until September, which also marked reverse in gold. Gold had given up all its gains by yearend and the Dollar was finished the year strong.

Flash forward to 2015 and the financial media is totally focused on Greece. I have no idea how the Greek elections will affect gold, but I do think any signals we need will show up on the price chart. Yes, turn off the TV and turn on the chart! The next chart shows February Gold Futures (^GCG15). I am using the futures contract because it is the closest thing we have to a pure play on gold. The Gold ETFs are made up of a basket of futures contracts and the ETFs have management fees, which makes them good surrogates, but not pure plays.

GOLD_5_January_2015

First, note that the long-term trend is down because gold hit a new low in early November. This means the bounce from 1140 to 1240 is a counter-trend move and the break below 1180 is bearish until proven otherwise. Gold has yet to continue lower as prices firmed the last two weeks, but I would like to see a break above 1220 to negate this bearish signal and consider a bullish alternative. The indicator window shows RSI below 60 since July. A break above 60 would be bullish for this momentum indicator.

The next chart shows the Gold SPDR (GLD) with resistance marked at 116.

GLD_5_January_205

The cart below shows the Dollar Index ($USD) breaking out in September and hitting its highest level since 2006. The index advanced over 10% last year and shows no signs of a top right now. Overbought is about the only negative I can come up with here and I do not consider overbought to be very negative. Why? Because it takes strong buying pressure to become overbought. The indicator window shows the correlation between gold and the Dollar. This is a weekly chart and I am measuring 26-week correlation, which is around six months. Except for a brief period in positive territory, gold has been negatively correlated with the Dollar for most of the last three years. With the Dollar in an uptrend and gold in a downtrend, this negative correlation reinforces the bearish argument for gold. The second chart below shows monthly bars and an even bigger breakout.

US_Dollar_2_January_2015 US_Dollar_Monthly_2_January_2015

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