By David Brady, CFA
Many traders have been complaining recently about the relentless fall in Gold - and rightfully so - seeing it lower every time they open their screens in the morning. Despite having already fallen ~$158 from its peak at 1369 in April, I am, as usual, seeing an increasing number of calls for Gold to fall below $1000 again. This seems to occur every time Gold falls to any extent, and this time is no different. With this in mind, I decided to take a look at the other side of Gold today, the case for further downside.
I am writing this article fully cognizant of the likelihood that this marks the low in Gold.
Gold has already fallen $158, as mentioned above. In prior cases, where Gold has fallen ~95 or more, this is what followed…
So despite all the doomsayers, it is reasonable to expect "at least" a healthy bounce soon.
Now let's review the technical case… Suffice to say from the outset, it's not pretty.
Gold has broken its uptrend dating back to the low in Dec 2015.
It has also broken its prior low in Dec'17 at ~1240.
The 200-day moving average is now sloping down again, which is bearish. But it did this in Dec 2016 also, just before Gold bottomed at 1124 and took off to 1362. It was also sloping down prior to its low in Dec 2015.
However, Gold is extremely oversold and positively divergent based on its Daily RSI and both MACDs, which would suggest that at least a healthy bounce is overdue.
The weekly chart shows that Gold has smashed through its 200-week moving average, which is bearish. Gold would need to break and close above 1235 to negate this breakdown.
However, the weekly RSI is also extremely oversold below 30, which also suggests at least a healthy rebound is pending.
Both MACDs are negative and falling fast, which is clearly bearish, but a gap has opened up between the MACD Line and its Signal that suggests at least a bounce is possible before lower again.
In summary, the technical picture is definitely bearish but perhaps too bearish, justifying a sizeable bounce after a $158 drop, which is reasonable based on such declines in the past. But even if we get such a bounce, like in the second half of 2015, we may not have seen the low just yet.
Gold's spot DSI hit a low of 7 on July 2, when it was at 1242. Its lowest level since it hit 4 on Dec 15, 2016, at 1124 and then rallied to 1362 from there.
Its 21-day moving average ("21DMA") hit a low of 12.5 on July 2 also. The last time it was lower was also in Dec 2016, when it hit a low of 9.7. Prior to that, you have to go all the way back to Aug 2015, when it hit a low of 12.
Could the spot DSI go much lower? Obviously not. But it can hang around here for a while as price continues to fall.
Alternatively, using Aug, Oct, and Dec 2015 as a guide (see 2015 chart above), the 21DMA could be signalling a significant bounce here as it did from Aug to Oct 2015, before falling to a higher low in the 21DMA in Dec 2015 but at a lower price, i.e. a positively divergent lower low.
Sentiment is a contrarian indicator. Suffice to say that Gold is extremely overbearish, which justifies a rebound, but it could become more overbearish based on the 21DMA in Dec 2016, or we could get a bounce in price and still see a lower low later this year, as in Dec 2015.
So Gold is extremely oversold on a daily and weekly basis and extremely overbearish also, but price continues to fall anyway for the time being.
We have seen open interest increase as Gold continues to fall through key technical levels. Is this Money Managers (aka "Funds") trying to buy the dip and getting hosed by the Bullion Banks, or could it be the Funds loading up short and the Banks becoming increasingly long? We will likely get some insight from the COT data tomorrow but if the former, it supports further downside. If it is the latter and Banks are loading up long, then that is bullish after a long decline with extreme oversold and overbearish signals.
Last week's COT data, when Gold was at 1255, seems like an eon ago. That said, Funds were short for the first time since Dec 2015. Price has continued to fall since then, which suggests that Funds are becoming increasingly short. At the same time, Banks (aka "Swaps") and Commercials remained short, while Other Reportables started adding to their long position again - their second highest long position on record.
In summary, it is difficult to find much in the positioning data that supports the bearish thesis save for the risk that Funds are trying to buy the dips. Hence, the increase in open interest, and Banks and Commercials remain short. Funds are short too, but I guess they could become even shorter, which is counterintuitively bullish.
Putting all of these traditional indicators together, prices could obviously continue to fall, but the elastic band is being stretched across technicals, sentiment and positioning, and similar such drops in the past justify a sizeable bounce soon. However, I don't believe this means that we have seen the lows. This could be the second half of 2015 all over again, with a lower low to come.
Such lower lows could be driven by a crash in stocks this Fall. Listen to my interview with Craig Hemke on this topic here:
Crashes are deflationary by nature, which could weigh on Gold or we could see a repeat of 2008 with repetitive waves of shock selling by the Bullion Banks to depress Gold and support the dollar. Either way, this could precipitate a lower low in price similar to that seen in Dec 2015. If such a crash were to occur and were followed by a Fed reversal to QE, then Gold would just explode higher, as it did during QE1 and QE2, only more so in my humble opinion.
Returning to the downside case… if USD/CNY continues to rise while XAU/CNY remains in a range of 8200-8360, then Gold could just keep falling straight down. As I stated in my previous article, I don't believe this is likely, because the U.S. would not tolerate such a move. It would undermine the whole purpose of U.S. tariffs by making Chinese exports cheaper in dollar terms. But it remains a distinct possibility, especially given the break of 6.70 this week.
At the same time, the GOLD/SDR exchange rate also suggests a significant bounce is not only possible, but imminent.
On a final note, if we do get new all-time highs in the S&P followed by a stock market crash later this year - something I have predicted since Feb - and the Fed is forced to reverse policy, then Gold will truly take off from that point in my humble opinion, regardless of what happens between now and then.
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