Why Gold Bulls Should Prevail This Spring

Summary

• Gold remains subject to cross-currents while the dollar remains firm.
• Though gold bulls aren't in control yet, the odds favor them this spring.
• Stronger raw industrial prices and China strength bode well for gold.

Gold prices continue to trend sideways as both supporting factors (the U.S. tariff scare) and detrimental developments (a rising stock market) converged to create headwinds against gold’s latest attempt at breaking out of its trading range. As we’ll discuss in today’s commentary, however, the outlook for an eventual gold upside breakout this spring is still promising.

Despite the latest spike in bearishness on the yellow metal among money managers, a strengthening in the U.S. stock market of late has put a damper on safe-haven interest in gold in the last couple of sessions. Gold prices were lower on Monday as higher equity prices and a firm dollar weighed on the yellow metal. Spot gold was 0.2 percent lower for Monday at $1,319. April gold futures were 0.30 percent lower at $1,320.

Providing some support for the gold price, however, is the unknown impact from President Trump’s proposal to raise tariffs on steel and aluminum. This proposal sparked some safe-haven buying of gold last week as investors feared the possibility of a global trade war. Gold prices were underpinned by uncertainty over Italy’s election results, as well as anticipated upcoming seasonal demand for the metal in India in April during the country’s Gudi Padwa festival. This may be enough to bolster the case for a safe-haven rally this spring, although there are still a couple of areas in need of strength before a sustainable rally kicks off.

With the “fear factor” over the possibility of a trade war, as well as rising interest rates, what else could possibly serve to propel gold prices higher? The most recent rally in the gold price last month was mainly a result of temporary short covering along with recent dollar weakness. But what could stimulate another, more sustained rally? In past commentaries we’ve examined some of these possibilities, including returning demand for major industrial/economic commodities such as oil and copper. To that end, observe that the CRB/BLS Raw Industrial price index continues its impressive V-shaped recovery since bottoming on November 23, 2015, after falling 27% from April 14, 2014’s high. It’s now back to the highest reading since September 2014 and not far below its multi-year high that same year.

Source: www.Barchart.com

More than perhaps any other commodity, the strong performance of the copper price since May of last year has solidified the case for improving global industrial demand which typically bodes well for gold. Besides being a key economic indicator, strength in copper has often served as a leading indicator for gold. Gold, like other metals, stands to benefit from the return of global demand as China’s consumption of copper is a sure sign of its strengthening economy. Additional improvement in China’s economy by extension is bullish for gold’s intermediate-to-longer-term outlook since China’s gold consumption tends to be commensurate with its economic prospects. As previously discussed here, the bullish case for copper can only bolster the longer-term case for the yellow metal.

Source: www.Barchart.com

On a technical note, the gold price hasn’t yet closed the two days above its 15-day moving average which is required to confirm that a new immediate-term (1-4 week) rally has commenced. Gold’s close cousin silver is also still under its 15-day MA, which is another sign that gold’s immediate-term trend hasn’t turned up yet. The anticipated signal in both metals could be coming soon but until we see the needed improvement mentioned here, the iShares Gold ETF (IAU) shown below remains in a neutral trend and is still subject to the conflicting forces mentioned earlier in this report.

Source: www.BigCharts.com

Another factor which is needed to confirm the breakout from gold’s immediate-term neutral trend is for the dollar index to break below its 15-day moving average. Shown here is one of my favorite dollar index proxies, the PowerShares DB US Index Bullish Fund (UUP). A decisive close under the UUP’s 15-day MA would not only give the gold price an immediate boost, it would signal that last week’s move by investors into the greenback while equities were being sold off has ended as inflation concerns return to the front burner. Gold’s biggest ally right now is sustained weakness in the dollar.

Source: www.BigCharts.com

For now I recommend that conservative gold and gold ETF traders continue to wait for the gold price to confirm a technical breakout in relation to its 15-day moving average (per the rules of my trading discipline) 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.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.