Gold’s Upside Is Limited—and Value Stocks Don’t Look Much Better - Barron's

Gold’s daily closing chart shows a tight trading range, with resistance in the $1,950 area and support around $1,860.

Eva Hambach/AFP via Getty Images

After having been bullish on gold all year, it was time to adopt a more cautious strategy, I wrote this past summer (“Gold Has Been on Fire. Here Comes the Drop,” Aug. 24). At the time, bullion was trading at $1,942 an ounce. Sentiment was too one-sidedly bullish, and the U.S. Dollar Index had stabilized. The longer that the dollar index was able to hold its 92-93 support, the more likely that its stabilization would support a 2%-4% bounce higher—pressuring gold lower.

Now that bullion reached $1,851 an ounce last week, let’s check the chart to see what’s next. It shows that gold had rallied back to $1,960 the previous week. But the rally proved to be short-lived, as bullion was unable to find support from its 50-day moving average.

The daily closing chart shows a tight trading range, with resistance in the $1,950 area and support around $1,860. Closing below $1,850 would project a further pullback to at least $1,800—and potentially $1,750.

The following month, I discussed why value’s then-current winning streak looked temporary (“Will Value’s Recent Strength Last? Don’t Count on It,” Sept. 30). Since then, the Russell 1000 Value Index has outperformed the Russell 1000 Growth index by 5%. But so far the move appears to be merely a mean-reversion bounce.

Why the recent bounce in value? Long-term Treasury-bond yields rose since then, with the 10-year T-bond yield climbing 25 basis points. (A basis point is 1/100th of a percentage point.)

Despite their recent strength, value stocks are still not ready for prime time. The chart of the Russell 1000 Value/Russell 1000 Growth Ratio shows a continuing decline in all of the moving averages, which help to define the major trend of any security or index. With all of the moving averages falling and the Value/Growth Ratio below the moving averages, value stocks’ upside potential remains limited.

Andrew Addison is the author of The Institutional View, a research service that focuses on technical analysis.

Email: editors@barrons.com

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Gold’s Upside Is Limited—and Value Stocks Don’t Look Much Better - Barron's
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