Gold Is Still In A Downtrend

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Includes: DGL, DGLD, DGP, DGZ, DZZ, FXY, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, JYN, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD, YCL, YCS
by: Macrotheme Capital Management LLC

Summary

Gold is still in a long term downtrend.

The Japanese Yen is also still in a long term downtrend.

However, it appears that the risk-on/risk-off balance has shifted in January of 2016.

I recently suggested a simple strategy on how to trade gold (NYSEARCA:GLD) now: essentially to buy the dips, but also to take profits and sell at least some of the long position after the rallies. Let me further elaborate.

First, I look at the chart to evaluate the historical price trend, I strongly advise not to trade against the trend. So, here is the chart for gold. Gold is still in a long-term downtrend!

The downtrend in gold started in August of 2011. In January of 2016, gold started with the bounce to the long term resistance line. However, following the correction, gold did not reach the new low - or breach the January 2016 support.

Thus, it is possible that we have the new long-term uptrend in gold, which started in January of 2016. However, this trend must be verified. Specifically, the most recent rally in gold broke the key downtrend resistance level. However, at this point gold did not make the new intermediate term high, which should be above the 1400 level.

As a result, gold should still be traded considering the long-term downtrend, but with the possibility that the trend has already changed. Once the new trend is verified, using whatever emerges in the pattern recognition, the trading strategy should also change to consider relatively larger and more aggressive long position.

I will follow the pattern recognition and update.

Fundamentally, gold is expected to reflect the message from other assets, or feed on general risk-off environment implied from the other asset classes. I previously discussed the possibility of the US recession as the key driver for gold price, and suggested to closely monitor the yields on 10Y T-Bonds (NYSEARCA:TLT), as well as the yield curve.

Now I will point to the relationship between gold with Japanese Yen (NYSE:FXY). Specifically, it is important to note that Japanese Yen also seems to be in a long-term downtrend, which started about the same time as the downtrend in gold, in September of 2011. Interestingly, the Yen bottomed in June of 2015 and traded range-bound, and subsequently broke-out of the range in January of 2016, exactly as gold potentially made the downtrend low point. Here is the chart:


So, as a reflection of general risk-off sentiment, the Yen has to hold the 0.80 support, and confirm that the longer term downtrend has essentially ended with the breakout in January of 2016. But also, the Yen has to break above the 1.00 level to confirm the new uptrend.

In summary, it appears that the risk-on/risk-off balance has shifted in January of 2016, as reflected by gold prices and the Japanese Yen. However, the new uptrend in these risk-off assets still must be verified. Thus, gold at this point is still an early momentum trade, and as such it's still too early to get aggressively long. However, a small long position, with profit taking (as well as loss taking) seems appropriate.

Disclosure: I am/we are long gold futures.

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: For accredited investors only.