The New Gold Rush Faces Stiff Resistance

Even if the precious metal rallies from here, it can probably only go so far.
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I used to have a huge chart on my wall that I would update once a week. Not a chart of the

Dow

or the

S&P

or even

Nasdaq

. It was a chart of gold.

The notion that gold goes up when stocks go down is nonsense. And the belief that gold goes up when the dollar goes down isn't exactly a perfect relationship either. That's not to say they don't have a relationship, but be careful about making too much of it.

As a reference point, let's start by looking at almost 20 years of data from the Philadelphia Stock Exchange Gold & Silver Index.

Notice that gold had a huge surge in the late 1980s, specifically in 1987, a year the stock market was up, and up big. Of course, stocks crashed in October of that year. But with the longer-term chart, the upward move in gold stocks in 1986-87 looks a lot more vibrant than the rise in gold stocks during the current three-year bear market, doesn't it?

All for the XAU
Good times and bad for gold and silver

I remember my first business trip to Asia, in the late spring of 1995. I arrived at Tokyo's airport and exchanged my dollars for yen. I received 81 yen to the dollar, which ended up being almost the exact low for the U.S. currency. Take a look at what gold was doing at the same time. The XAU was around 120 when the dollar/yen made its low. Then it fell to 105 -- note it didn't rally. The index did move higher, up to 150,

after

the dollar made its low.

10-Year XAU
Note the independence

While there can be a relationship between gold and the dollar, it's not exact, and I think it's best to look at gold on its own. If we do, we see resistance overhead. Maybe gold held at those support levels, maybe gold held that uptrend line, but the real question is where is it going on the upside? My sense is that it's going nowhere.

Telling Year
Resistance is overhead from here

The first thing gold would need to do is cross the downtrend line from the February highs. I'd like to see it cross the line meaningfully, not in meandering fashion. The next thing I see on the chart is that little breakdown when gold prices were at $340 to $350. If gold managed to get across that downtrend line and get to $340 to $350, it will still only look like it's rallied back to resistance and the breakdown level.

The resistance area is what I keep seeing each time I look at the chart, and it's more important to me than crossing the downtrend line. That's because the first time up, the resistance will be too severe for gold to get through. So it appears to me that gold probably has more work to do before it can rally well.

Plus, the XAU has the same resistance to contend with beginning at 70 and all the way up to the highs. Time has a tendency to mirror itself on the charts. The recent top was about three months long, but we've only spent about six weeks under the highs, indicating that the timing for a big rally seems wrong at this point.

Finally, the S&P has rallied from 800 to almost 900, but no one is telling me about how great the market is. A lot of people are trying to tell me how well gold and gold stocks are acting. My experience is that when many people are spending too much time trying to convince me of something, the move is already priced in, or close to it. The resistance overhead coupled with this anecdotal sentiment is the main reason I don't think gold is all that glitters right now. I think at best you're looking at a rally that stops at resistance.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's

primer.

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Helene Meisler, based in Shanghai, writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to

Helene Meisler.