Gold's Window Of Opportunity Is Opening

Includes: FXE, IAU
by: Clif Droke

Gold's downward trend still intact, but things are looking up.

Dollar weakness and euro strength bode well for a gold relief rally.

Reduction of trade tensions should also help gold establish a bottom.

After several grueling weeks of decline, the price of gold finally has a chance to rally in the weeks ahead. While the yellow metal still hasn’t technically confirmed an immediate-term bottom, the technical and market sentiment backdrop for the metal has improved enough to justify a rally. In today’s report we’ll go over the factors which are lining up in gold’s favor, as well as the remaining factors needed to confirm a price low.

Gold was down by 0.20% on Friday after nearly touching the technically significant 15-day moving average in the previous session. Nonetheless, bullion registered a small weekly gain amid escalating U.S.-China trade tensions. This was a tiny victory, but a sign nonetheless that the bulls are trying to put the brakes on gold’s latest slide.

Meanwhile the dollar fell after data showed the U.S. unemployment rate increased and wages grew in June even as the U.S. economy created more jobs than expected. Of significant, the U.S. dollar index (DXY) has fallen in each of the last four trading sessions and finished last week decisively under its 15-day moving average. This was the first time since a month ago that the dominant immediate-term (1-4 week) trend line was violated. It’s also the biggest amount in which the 15-day MA has been broken since March. This holds technical significance for gold since decisive weakness in the dollar index typically precedes rallies in the gold price.

U.S. Dollar Index

Source: BigCharts

It’s also worth noting that U.S. tariffs on $34 billion worth of Chinese goods took effect on Friday, while China's commerce ministry retaliated with 25 percent tariffs on $34 billion worth of U.S. imports. Equity markets ignored the imposition of the tariffs, with stocks edging higher for the second consecutive day. As I’ve previously emphasized, a relief for equity markets from trade tariff fears should bode well for gold since it should reduce safe-haven demand for dollars.

Although gold remains under some pressure in early July, the leading factors discussed above are pointing to better times ahead for the metal. June in particular was a bad month for gold, as gold-backed ETFs experienced outflows in North America and Asia, as a strong dollar depressed the gold price. According to a July 6 World Gold Council report, North American investors sold 44.4 tons of gold-backed ETFs worth $1.9 billion last month, compared with outflows of nearly 30 tons worth $1.2 billion in May.

The U.S. dollar, by contrast, rose to a one-year high last month as investors sought refuge in the greenback as global trade tensions between the U.S. and China increased. As we discussed in previous commentaries, investors liquidated gold holdings to cover losses in emerging market stocks and other assets that were directly impacted by the tariff disputes.

The extent of gold’s June decline can be seen in the graph of the heavily traded iShares Gold Trust (IAU). While the IAU remains under its 15-day moving average, it will likely make another rally attempt this month fueled by the dollar’s latest pullback. We need to see a 2-day higher close above the 15-day MA, however, before an immediate-term (1-4 week) bottom has been confirmed for the gold ETF.

iShares Gold Trust

Source: BigCharts

Meanwhile, European gold-backed ETF inflows increased slightly by 0.5 tons worth $52.3 million, in June, up 0.1 percent from May. This was the third consecutive month of inflows in Europe, according to WCG data. Although the gold price hasn’t yet closed above its 15-day MA, the euro currency has already established an immediate-term low above the 15-day trend line. This carries a potentially bullish implication for the gold price in the near term.

Shown below is the Invesco CurrencyShares Euro Currency Trust (FXE) in relation to the 15-day MA. The technical significance of this chart, aside from the aforementioned immediate-term trend line breakout, is that FXE’s 12-day price momentum readings have shown gradual improvement since early May. At that time, downside price momentum for the euro currency ETF was at its most “oversold” level in over a year.

Invesco CurrencyShares Euro Trust

Source: BigCharts

In the last two months, downside momentum for the FXE has gradually diminished as the following chart shows. Historically, relative strength in the FXE has frequently paved the way for gold rallies (although the lag time can sometimes be several weeks). This another indication that gold’s window of opportunity for a summer rally is starting to open.

Until gold actually confirms an immediate-term bottom, however, I continue to recommend that investors avoid new commitments in the iShares Gold Trust (IAU). We’ll let the market tell us when the selling pressure has abated enough to warrant initiating new long positions in gold and the gold ETF.

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.