Gold Bugs Face Chart Dilemma (GLD, IAU, SGOL, DGP)

It has been impossible to ignore the sideways trading pattern in gold of late. Despite a 1.5% move up on Tuesday, gold bugs, traders, and investors in the SPDR Gold Shares (NYSE: GLD), iShares Gold Trust (NYSE: IAU), and ETFS Physical Swiss Gold Shares (NYSE: SGOL) will all need to watch the charts here.  That is double the case for the PowerShares DB Gold Double Long ETN (NYSE: DGP) with its leveraged gold trade.  What is interesting is that the charts and the fundamentals may be giving two different reads entirely.

This is certainly not the first such notice, but what we have been watching is what appears to be the formation of a head and shoulders chart pattern.  Our problem here is that you never know if it is real until it is confirmed.  This marks the fourth such time we have seen a pattern start as a head and shoulders, but each has only been a pause where traders and investors shook the sellers out of gold.   A chart analysis from our affiliate at INO this morning shows that gold bugs may be coming back in after today’s move.  Longer-term charts are still looking up, but Adam Hewison of INO has a short audio-video showing that near-term charts are sideways to even down, but longer-term the charts are still indicated for strength.

Where this is confusing is that many of the same fundamentals are in place for gold.  Forget the jewelry and industry angles.  This is as an investment class and as the new currency.  The looming trouble in the European Union is to blame for the latest infighting on the price of gold because the dollar is no longer in free-fall.  Still, we are beginning to see the cracks in the foundation of debt instruments and it is hard assets that will be sought if currencies continue to be diluted and diluted.  We noted in mid-November that the correlation trade was showing cracks, indicating that stocks and bonds, and commodities and currencies might not just all react to each other as we had seen for months and months.

Maybe the currency effect is more of a decade long event without a single catalyst and with an overnight reaction.  Still, demand is high and mining gold is much different than the old prospecting days of looking for gold in rivers and looking for shallow-dirt gold veins in hills and mountains.  Some is taken by strip mining and treating to extract gold  particles and other mining is deep in the earth.

The fundamentals still seem high for gold.  We even went as far to give gold an honorable mention in our recent piece of ETFs For Futurists looking to capture secular trends.  The chart is still unfinished business.

The next week is likely to be a very pivotal week for gold.  It could set the tone for a serious pullback or a real continued rally.  The gold bugs will be watching, and the speculators… well, they’ll be speculating.

1:25 PM EST Update: Unusual Options Alerts in long-dated GLD LEAPS

JON C.  OGG