Important Juncture For Gold Price Imminent

Summary

• Breakdown of safe-haven demand hurts gold in October as benchmark price is being tested.
• Gold still hindered by a strengthening dollar but still manages to hold above pivotal October low.
• Tug-of-war between bulls and bears will soon be resolved if oil, CRB index are any indication.

Spot gold slipped by 0.40 percent to $1,270 to finish October with a second straight monthly decline. December gold futures declined 0.50 percent to $1,271.40.

The price of gold dropped on Tuesday as the dollar ignored Monday’s news that investigators had charged President Trump’s former campaign manager Paul Manafort. The greenback continued its upward trend and finished October with its best monthly performance since February, putting pressure on the yellow metal. However, gold still remains above its October low as the bulls fight to maintain control of gold's immediate-term trend. In this commentary we'll examine the short-term outlook for the yellow metal in light of recent news developments. We’ll also discuss the strong possibility that the next few days will likely see a resolution to gold’s 4-week consolidation.

The front burner news facing investors this week is President Trump’s expected nomination of Jerome Powell as the next chairman of the Federal Reserve, replacing Janet Yellen, whose term expires early next year, according to news reports. Powell has reportedly supported Yellen’s approach to monetary policy and financial regulation, and observers believe he will continue her policy.

Powell has also voted for every Fed policy decision since 2012, according to reports. In recent years, he has backed the methodical unwinding of the Fed’s stimulus campaign, which involved purchasing $4 trillion worth of Treasuries and mortgage-backed securities to help the economy recover from the 2008 financial crisis. According to Richard Fisher, a former Fed official and Powell colleague, Powell “is neither a hawk nor a dove.”

Global equities, meanwhile, hit a record 12th month of gains for October as a 5 ½-month high in European stocks and records elsewhere underscored one of the most robust bull markets on record. The Nasdaq Composite Index meanwhile rose to a record high on Tuesday as the tech sector registered its fourth straight month of gains and its best monthly performance since February. Rising equity markets around the globe have diminished investors’ demand for gold, undermining its safe-haven appeal in recent weeks.

With equities stealing gold’s thunder, it’s amazing that the gold price has shown as much resilience as it has in the last few weeks. Shown below is the daily graph of the iShares Gold Trust ETF (IAU), which is my preferred proxy for the gold price. As you can see, IAU is struggling to keep above its nearest pivotal low – which I consider to be the 12.11 level from early October. I’m currently long IAU as long as this level remains intact. It has been a long, grueling, and at times nail biting experience as we wait for gold to resolve its 4-week holding pattern. There is a strong chance, however, that the month-long trading range for gold will be resolved in November.

Source: www.BigCharts.com

When we examine the five factors which historically have supported a strong gold price performance, we find that only one of those factors is currently supportive of gold. Here are the five factors:

1. The gold price should be above its rising 15-day moving average.
2. Silver should be strong (i.e. confirming or preferably outperforming gold).
3. Gold’s relative strength (vs. the S&P 500) should be rising.
4. The U.S. dollar index should be below its 15-day, 30-day and 60-day moving averages.
5. The crude oil price should be strengthening.

Only the crude oil price is strong right now while the other four factors aren’t currently aligned in gold’s favor. Of the five mentioned above, the most onerous obstacle to a gold price rally is the dollar index which has been rallying in recent weeks. Shown below is the U.S. Dollar Index (DXY) in relation to its 30-day and 60-day moving averages. This has been creating strong headwinds against gold in the past month and is the main reason for the yellow metal’s underperformance.

Source: www.BigCharts.com

Despite this, there are at least two more indications which suggest that all is not lost for a potential gold rally in November. Consider that aside from the oil price bucking the stronger dollar, the copper price has also been buoyant in the last six months and is currently just under its high for the year. Meanwhile the Thomson Reuters/Core Commodity CRB Index (CRB) is also on the upswing and is at a 6-month high.

Source: www.BigCharts.com

The CRB has a history of anticipating reversals of fortune in the gold market. If the rally in the CRB index picks up steam in November in the face of the stronger dollar, it would telegraph the message that the global industrial outlook is definitely improving along with demand for metals in general. This in turn would greatly bolster gold’s intermediate-term prospects.

In any case, a resolution to gold’s 4-week lateral trend is likely imminent in view of the latest test of its pivotal early October low. Normally, when gold has twice tested an important chart benchmark like the 12.11 level in the iShares Gold Trust ETF, a juncture is at hand. Gold will either break under its October low in the coming days or else rally back above the important 15-day moving average (see IAU chart above). If we were to judge gold’s near-term prospects strictly by the action of the dollar index, we’d have to conclude that the odds are against gold getting above the 15-day MA anytime soon.

However, both the oil price and the CRB are quite strong and suggest that latent commodity market strength may soon come to the yellow metal’s aid. Keep in mind that commodity fund managers use oil as a proxy for inflation-sensitive commodities like gold. So when they see strength in the crude oil price they typically start looking around for potential entries in gold (which often follows oil’s lead). Something has to give in the coming days and I’ll venture that if IAU pushes above its 15-day moving average the bulls will force the sellers to cover quickly, leading to another short-covering rally. In either case, I’m still long the IAU above the 12.11 level (stop) and I expect the coming weeks will fully resolve the recent tug-of-war between the buyers and sellers.

Analyst’s 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.