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Is It The Beginning Of The Next Bull Market In Gold?

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Includes: AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, GDX, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, OUNZ, PHYS, PSLV, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: Simple Digressions
Simple Digressions
Contrarian, long/short equity, Deep Value
Summary

Last week gold prices broke above their strong support at $1,300 per ounce.

In my opinion, it was a very important event increasing the chances for a new bull market stage in precious metals.

However, a few important market internals do not confirm this breakout.

Now, to validate the last breakout, gold prices have to hold above $1,300 per ounce (a new support level).

It happened – last week gold prices broke above their strong resistance at $1,300 per ounce. Gold bulls should be satisfied because the gold’s big picture looks much better now:

Source: Simple Digressions

Firstly, a long-term down-sloping trend line (the green line) has been broken (the red circle). Of course, the skeptics may say that the logarithmic trend line is still untouched, but that is a detail to be discussed among the fans of the classic technical analysis.

Secondly, to trumpet a new bull market stage the prices of gold should break above another resistance – this time at $1,375 per ounce (the last top in gold prices established last year). However, it is another dispute to be held among the fans of the classic technical analysis and the question is: “Which price level is more important: $1,300 or $1,375 per ounce?” I have no idea…

Now, the big picture is what everybody can easily spot. However, there are less evident patterns that a careful analyst cannot ignore. Let me discuss some of them.

Silver/gold ratio

As a rule, during a healthy bull market in precious metals the silver performs better than gold and the silver/gold ratio is going up. And vice versa, during a healthy bear market in precious metals the gold outperforms silver (and the silver/gold ratio is going down). Now look at the chart below:

Source: stooq.com

Since the end of 2016, gold prices (the black trend line) have been going up (the red arrow). However, contrary to the general rule, the silver/gold ratio (the light line) has been going down (the blue arrow). In other words, the bull case for gold is not confirmed by one of the most important market internals, the silver/gold ratio.

Gold prices expressed in other than the US dollar currencies

As a rule, during a healthy bull market in precious metals, gold prices expressed in US dollars and world’s major currencies go in tandem. It means that each time gold prices (expressed in US dollars) print a new top, gold prices expressed in euros, British pound, etc. make a new top as well.

Now, as my readers know, instead of tracking gold prices denominated in many currencies, I am using the so-called GoldDollar index (a very helpful tool to track gold prices expressed in world’s major currencies, excluding the US dollar). Here is the updated GoldDollar chart (plus the classic gold chart on the lower panel of the chart):

Source: Simple Digressions

Note the first three tops (1 – 3) on the upper and lower panel of the chart – each top in gold prices was confirmed by a similar top printed by the GoldDollar index. In my opinion, between December 2016 and April 2017, the gold market was in its healthy bull market stage.

Then, the next top in gold prices (point 4 on the lower panel of the chart) was not confirmed by a similar top in the GoldDollar index. Since that time (June 2017) gold was trading in a range.

Last week the prices of gold broke above their resistance at $1,300 per ounce (point 5 on the lower panel of the chart) but the GoldDollar index (point 5 on the upper panel of the chart) was still below its previous top (point 4). So, once again, we have a situation when gold prices do not go in tandem with the GoldDollar index. In my opinion, it is not a healthy bull market in gold.

Note:

The disparity between gold prices and the GoldDollar index is not a major constraint. For example, the same negative pattern was delivered by copper. On July 25, 2017, copper prices broke above their strong resistance. However, it took one month until the CopperDollar index broke above a similar resistance (August 24). Now both charts (copper and the CopperDollar index) go in tandem.

Money Managers are very optimistic about gold

The gold market is hot now. According to the Commitments of Traders report (COT report), last week Money Managers became very optimistic about gold prices. The ratio defined as

Long position held by Money Managers/Short position held by Money Managers in gold futures hit 16.9 (the red circle on the chart below). It is a very high reading. For example, during the last bull market in gold (January 2016 – September 2016) the highest reading was 13.2 (September 6, 2016). What is more, the recent tops in gold prices were accompanied by much lower readings (the red rectangle on the chart below). It seems that Money Managers have become too optimistic about gold prices:

Source: Simple Digressions

Let me show another chart:

Source: Simple Digressions

This time it shows a net long position held by Money Managers. The red circle shows that we are very close to the overbought conditions visible in the summer of 2016 (the blue circle).

Summary

The big picture is very positive for gold bugs. Gold prices broke above their long-term downward trend line that started in middle 2011. What is more, my gold and silver sentiment indices indicate that there is plenty of room for both metals to go up (especially for silver).

On the other hand, a few market internals are sending warning signals that there is something wrong with this market. Therefore, a short-term correction in gold prices is probable. However, at this point I am not bothered with the scale of such a correction (or consolidation) because the most important thing is whether gold prices are able to hold above their support at $1,300 per ounce (a former resistance level). If they hold above this support, all negative, short-term indications (discussed above) should vanish.

Note:

If you liked this article, please, visit my Marketplace service (Unorthodox Mining Investing) where I am doing my own research. However, this time I also want to say this:

If you are looking for a guru or a person that instructs you when buy/sell gold, I strongly advise you that my service is not for you. I am not a guru or a talking head – I am just an independent analyst trading stocks and financial futures and…making mistakes.

On the other hand, if you are looking for new ideas, an unorthodox approach to investing, decent mining picks (since the inception, my Unorthodox Mining Portfolio once again delivered better returns than the broad precious metals market) and open discussion, this service is definitely for you.

Disclosure: I am/we are long GDX, CEF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I hold a long position in US dollar index futures