- Gold still under short-term pressure as stock market weakness weighs.
- Once panic mentality recedes, however, gold should bottom.
- Yellow metal stands to benefit from increasing fear factors.
After breaking its pivotal short-term support earlier this week, gold and the leading gold ETFs showed additional weakness on Thursday as investors' concerns over President Trump's latest trade policy plans created ripple throughout the financial market. As I'll emphasize in today's commentary, however, this doesn't necessarily mean gold's near-term fate has been sealed. Rather, the odds still favor both gold and gold mining stocks coming out of this latest malaise with a new found vigor resulting, ironically, from the very same investor fears which created it.
Gold was decisively lower on Thursday in the wake of a sell-off in the U.S. equity market. Gold prices declined by an average about 1% and hit two-month lows during the session. However, the gold ETF I track in this report bounced off session lows after Federal Reserve Chair Jerome Powell told the Senate Banking Committee the Fed didn't see evidence of a strong advance in wages, thus mitigating investors' recent concerns. Meanwhile, gold and silver mining stock prices managed to rally on Thursday and were among the only stocks to do so in a market characterized by across-the-board selling pressure.
The financial market plummeted after President Trump said he would impose high tariffs on imports of steel and aluminum despite the displeasure of his economic advisors. Trump said he would formally sign the trade measures next week and said they would be in effect "for a long period of time," according to the New York Times.
U.S. Treasury yields fell 2.23% on Thursday, which put some downward pressure on the dollar index. While the gold futures price was essentially unchanged, the iShares Gold Trust (IAU), which I use as a preferred trading vehicle and proxy for gold, declined 0.32% after seeing an even steeper intraday move as mentioned previously. Additionally, a strengthening U.S. dollar in the last few days has kept a lid on gold's attempt at rallying.
Shown here is the latest IAU graph, which reflects the recent overhead resistance facing the yellow metal of late. On Tuesday, Feb. 27, IAU violated the $12.62 level which was not only the pivotal low that was established at the Feb. 7 bottom but in doing so it violated my recommended stop loss and pushed us out of our immediate-term trading position in the ETF. As long as the IAU price remains under its downward-sloping 15-day moving average, its immediate-term (1-4 weeks) trend is considered to be weak. Accordingly, a rally which pushes the IAU price two days higher above its 15-day MA is needed to confirm that the immediate trend has reversed for the ETF based on the rules of my technical trading discipline.
Up until now, the yellow metals' safe-haven appeal has been somewhat diminished as investors were put off by a decided lack of bad news recently concerning the global economy. Meanwhile, equities are undergoing what might be termed a "bull market correction," and this is putting at least some immediate-term pressure on gold for reasons explained in Thursday's commentary. As I explained there, gold often follows the downward trajectory of stocks during a panic-induced plunge, at least temporarily. Once the initial panic which caused stocks to sell off has subsided, however, gold is usually among the first major assets to bounce back and often exceeds the subsequent rallies in the stock market. Indeed, the residual fears which produced the stock market panic more often than not serve to bolster gold's intermediate-term (3-6 month) performance. I expect a similar outcome following the market's latest fear over Trump's proposed tariffs.
While a strengthening dollar doesn't necessary mean gold prices will trend lower, it does create a strong headwind for gold prices in the near term. If the dollar continues to strengthen, it will increase the resistance against a further gold rally and may force the gold bulls to content themselves with a trading range while equities continue to languish in the immediate term. Accordingly, during the next several days, it will also be important that we continually monitor gold's relative strength indicator (versus the S&P 500 Index) for changes in its short-term technical profile.
Speaking of headwinds, although the latest fears facing the market, including rising rates and import tariffs, have weighed on the gold price, it has also created an eventual "wall of worry" and advertisement for gold's safety appeal. Once the irrational panic mentality which was in evidence on Thursday has completely subsided, traders should be watching for gold's immediate-term trend to bottom out.
Turning our attention to the gold mining stocks, although the PHLX Gold/Silver Index (XAU) has failed to confirm an immediate-term buy signal per the rules of my trading discipline since December, it showed a measure of relative strength on March 1. The XAU is still below its downward-tilting 15-day moving average as can be seen in the following graph, which confirms that the actively traded mining shares are still in the hands of the sellers.
Yet the index is also in the process of testing its Feb. 9 low and is showing signs of trying to establish this low as an intermediate-term (3-6 month) bottom. This secondary test of the February low in next couple of days will ultimately determine whether the index is primed for a turnaround in March. In any case, until the XAU confirms an immediate-term bottom by closing two days higher above the 15-day MA, I recommend that conservative traders maintain a heavy cash position and refrain from making any new purchases in the individual gold and silver mining shares.
For now, I also continue to recommend that conservative gold traders keep their powder dry and wait for the gold price to decisively strengthen before initiating any new trading positions. Longer-term investment positions in gold, however, can be maintained as the fundamentals underscoring gold's two-year recovery effort are still favorable.
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