Gold Bulls Hanging On By A Thread

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Includes: DGL, DGLD, DGP, DGZ, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Clif Droke

Summary

Gold’s immediate-term buy signal still intact, but just barely.

Strengthening dollar, on the back of Fed rate expectations, is creating headwinds.

The internal condition of the actively traded gold mining stocks provides clues for gold’s near-term outlook.

Gold prices dipped on Tuesday as investors anticipated the announcement of who will lead the Federal Reserve next year. Meanwhile, a strong U.S. stock market and a calmer geopolitical environment undermined safe-haven demand for gold. The immediate-term buy signal for gold, which was confirmed earlier this month, remains intact, but only just barely. In this commentary, we'll examine the near-term prospects for the yellow metal in light of the latest developments.

Spot gold slipped 0.35 percent to $1,278 on Tuesday after hitting its lowest since Oct. 6 at $1,271 in the previous session. Spot gold has shed 6 percent since reaching a one-year high of $1,357 on Sept. 8 due to a rebounding dollar and expectations of higher interest rates. December gold fell 0.30 percent to $1,277. Silver fell nearly 0.70 percent to $16.94 an ounce, after hitting its lowest since Oct. 9 in the previous session.

President Trump told reporters on Monday he was "very, very close" to making his decision on who should chair the Federal Reserve. A hawkish candidate would likely favor higher interest rates, thereby boosting the value of the dollar and making gold more expensive for holders of other currencies. Earlier reports indicated that Trump is leaning toward Fed Governor Jerome Powell, who is perceived as a less hawkish candidate.

Meanwhile, the Fed is expected to raise interest rates in December and twice in 2018, according to a Reuters poll of economists. Respondents, however, expressed worry that the Fed would slow the pace of its tightening because of the central bank's low inflation expectations.

Turning our attention to the technical picture, one of the biggest headwinds for gold right now is the U.S. Dollar Index (DXY). A strengthening dollar has put pressure on the gold price, making it difficult for the metal to gain any traction despite strength in the overall commodities market, including copper and oil. Gold has been extremely sensitive to rallies in the DXY lately, more so than many other commodities. The DXY has also the recent attempts of dollar bears at pushing the dollar index under the 60-day trend line. Therefore, the intermediate-term position of the dollar remains stable. See the DXY graph below.

U.S. Dollar Index

Source: www.BigCharts.com

As shown above, DXY has established near-term support above the 60-day moving average which overlaps the 93.00 level of the index. A decisive close under the 60-day MA would increase the chances of a gold rally as previously mentioned. But as long as DXY remains above this level, the gold bulls will be hard-pressed to push the gold price higher.

Notwithstanding the dollar's latest strength, the recent immediate-term (1-4 week) buy signal in the iShares Gold Trust (IAU), my favorite gold proxy, remains intact. To reiterate, a buy signal under the rules of the 15-day MA trading method is predicated on a 2-day higher close above the 15-day trend line, provided that the gold price has declined more than 4% from its nearest high. IAU met the conditions for this earlier in October. Assuming it doesn't violate the nearest pivotal low of 12.11 (the Oct. 6 intraday low) on an intraday basis, the buy signal for IAU will remain intact. What's more, a weekly close above the 60-day trend line in the IAU (see chart below) would also serve as a welcome addition in repairing the intermediate-term uptrend for IAU, which was established earlier this year.

iShares Gold Trust ETF

Source: www.BigCharts.com

Aside from the stubborn strength in the dollar, the biggest obstacle to a gold rally is the lack of internal momentum in gold mining stocks. Gold and silver stocks are leading indicators to the physical metals, and it's rare indeed for the mining stocks to be weak while physical gold is strong. Thus, the PHLX Gold/Silver Index (XAU), and its individual components, is a relevant predictor of the upside potential of the gold price.

Here, you can see the weakness in the XAU as of Oct. 24 as the index broke decisively under its recent chart support at the 84.00 level (conveniently underscored by 120-day moving average. The XAU has now established a pattern of lower highs and lows, which shows that the bulls have lost control of the immediate-term trend.

PHLX Gold/Silver Index

Source: www.BigCharts.com

Another indication that the bulls face an uphill struggle in regaining control of the short-term trend can be seen in the following graph. This shows the short-term directional component of the gold stock internal momentum indicator series known as GOLDMO. Basically, the indicator shown here is a four-week rate of change of the daily cumulative new highs-new lows of the 50 most actively traded gold mining shares. This indicator reflects the path of least resistance for gold stocks in the near-term outlook. With this indicator declining, the bears technically have an advantage over the bulls and will be able to exert their will over the gold stocks with minimal effort should they choose to exercise it.

Chart created by Clif Droke

The negative technical developments in the gold and gold stock markets of recent days have cast a serious shadow on the near-term prospects for the yellow metal. While the immediate-term buy signal remains intact for the gold ETF (IAU), unless the internal situation for gold stocks soon improves gold, and the gold ETF by extension, will be increasingly vulnerable to another selling raid by the bears. Accordingly, I recommend that traders closely monitor stops in the next few days. My recommended stop loss for our IAU position is slightly under the 12.11 level (the Oct. 6 close) on an intraday basis.

Disclosure: I am/we are long IAU.

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.

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