Gold Breaks Higher On Fear

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDM, GLDW, GLL, GTU, GYEN, IAU, IAUF, NUGT, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Andrew Hecht
Summary

Stocks tank, gold pops.

The dollar remains around the 95-pivot point.

The 50% retracement level is a target on the upside.

Bucking trends in the gold market.

NUGT for the brace at heart to turbocharge results.

The price of gold had been in a bear market since moving to a high at $1365.40 in late April of 2018. The peak price created a double-top formation in the futures market for the yellow metal as it reached a price that was equal to the January 2018 high. After rejecting an attempt to make a higher high, gold turned lower, and a strong dollar over the summer sent the price of the yellow metal to a low of $1161.40 per ounce in mid-August. Gold’s low came at the time the dollar index traded to its most recent high.

Gold fell by $204 or 14.9% from late April until mid-August, but the price found a bottom and spend the rest of the final month of summer, September, and the first week of October trading around the $1200 per ounce level on the active month December COMEX futures contract.

Last week, we saw the first signs of life and recovery in the gold market. Short-term technical resistance on December futures had stood at the late August peak at $1220.70 per ounce, but during the week of October 8, the precious metal climbed to $1230 as all hell broke loose in the U.S. stock market.

Stocks tank, gold pops

During the week of October 8, the weight of trade issues and rising interest rates became too much for the stock market which experienced a sharp downside correction. However, the writing was on the all the previous week.

Source: CQG

As the weekly chart of the E-Mini S&P 500 futures contract highlights, the stocks put in a bearish key reversal trading pattern during the first week of October moved appreciably lower the next week and remained closer to the lows than the early October high as of the close of business October 15.

Corrections in the stocks market typically lead to periods where investors and traders head for the safest assets during times of increased volatility. These risk-off periods can be times when the prices of all markets head lower as capital flows to cash and U.S. government bonds. However, last week, one asset that has experience selling pressure since April as rates and the dollar headed higher, saw buying that lifted it to the highest price since July. Gold had been under pressure since its January and April 2018 double top at $1365.40 and traded to just over $1160 in mid-August.

Source: CQG

As the daily chart shows, December gold futures on COMEX had been trading in a range from $1184.30 to highs of $1220.70 since recovering from the mid-August low. Gold had been trading around the $1200 per ounce pivot point on the December contract. On October 11, as stocks fell, gold took off to the upside breaking above its short-term technical resistance level at just over $1220 per ounce. The yellow metal rose to a high of $1230 on the session on the most substantial volume since late May at just under 560,000 contracts. Both volume and open interest rose as the price moved to the upside which typically supports the emergence of a bullish move in a futures market.

Source: CQG

The weekly chart illustrated that the yellow metal put in a bullish key reversal trading pattern on higher than average volume during the week of October 8. Gold fell to a lower low than the previous week at $1183.70 and closed above the prior week’s high. On Monday, October 15 gold traded to a higher high at $1236.90 per ounce.

Higher interest rates and a stronger dollar had weighed on the price of gold since April, but the dollar ran out of gas on the upside since its high in mid-August.

The dollar remains around the 95-pivot point

In August the dollar index got up to a peak at 96.865 on the continuous futures contract, a 10% gain from the February low at 88.15.

Source: CQG

Since late August, the dollar index has traded in a range from 93.395 to 95.84 on the December futures contract. The pivot point for the greenback has been at 95, and on Monday, October 15 it settled at 94.754 and was not trading far off that level on October 16. The stable dollar over recent weeks provided fuel to the gold market which had been taking its clues from the greenback. A stronger dollar had weighed on the price of the yellow since April. With the dollar at the 95 level and going nowhere fast these days, gold has attracted buying that reflects the rising level of fear and uncertainty in the stock and bond markets.

The 50% retracement level is a target on the upside

The weekly gold chart shows that a 50% retracement of the move from the April high at $1365.40 to the mid-August low at $1161.40 stands at $1263.40 which is the first level of technical resistance. Above there, $1280 and $1325 would present a short-term challenge to any attempt for the price of gold to climb.

The price of gold had been sleeping around the $1200 per ounce level since late August as the yellow metal took clues from the dollar. In September, the price of silver traded to its lowest level since early 2016 when it moved to a low of $13.91 per ounce. The 2015 low in silver stands at $13.635, and while the precious metal moved within 27.5 cents of a challenge of that critical support level in the silver market, it did not encourage gold to challenge its mid-August bottom at just over the $1160 level. The downside spike in silver turned out to be a head fake move, and silver was trading at the $14.70 level on October 16. Silver did not entice gold to make a lower low last month, but it is not lighting the world on fire as gold broke to the upside last week. Technical resistance in the December silver futures market stands at the October 2 high at $14.95 and the August 28 peak at $15.07 per ounce. A move above these levels could provide a degree of validation to the recent price action in the gold market as it would tell us that investor and speculative buying was returning to the precious metals arena.

Bucking trends in the gold market

Gold began bucking trends earlier this year, and a continuation of the current rally will keep the pattern of bucking the trend intact. Gold had been making higher lows since December 2015, and until 2018, the yellow metal had not traded below the low from the previous December. The gold futures market experienced selling during the final month of the year in 2015, 2016, and 2017 as the Fed hiked interest rates during their last FOMC meeting in each year. The central bank’s tightening cycle caused selling in the gold market and resulted in a pattern of December lows. However, in 2016, 2017, and even in 2018, gold came out of the gate rallying each year.

This year, gold broke below its December 2017 low in July when the price fell below the $1236.50 support level. The yellow metal than proceeded to take out support levels at $1204 and $1194.50 on its way to $1161.40 in August. However, gold held the 2016 low at $1123.90 which was the next target on the downside.

As we head into the final two months of 2018, we are moving into a period where the yellow metal moved lower in each of the past three years and made significant lows. The odds currently favor another interest rate hike at the December FOMC meeting which could put the price of the yellow metal on the defensive.

Meanwhile, there are no guarantees or certainties in the commodities futures markets. Historical patterns are just that, and we have already seen gold buck historical trends in 2018. If gold can hold the mid-August low, we would break the bearish trading action at the end of the year.

NUGT for the brace at heart to turbocharge results

The next few days will tell us a lot above the strength of the gold market as it comes down the final stretch in 2018. I will be keeping my eyes on silver as a break to the upside in the silver market above the $15 per ounce level could be a significant bullish validation for gold.

Meanwhile, when it comes to selecting an instrument to participate in gold if it is going higher from its current level to challenge $1260 and levels above, gold mining stocks tend to outperform the price action in the yellow metal during bullish periods and underperform during bearish periods on a percentage basis.

Gold fell from $1365.40 in late April to lows of $1161.40 in mid-August, a decline of 14.9%. During the same period, the GDX gold mining ETF product fell more.

Source: Barchart

As the chart shows, GDX fell from $23.30 in April to lows of $17.28 in September while gold was under pressure, a drop of 25.8%. The gold rally from lows in August to highs of $1232.30 on the continuous futures contract on October 15 took gold 6.1% high, while the GDX rallied from the September low to $20.39, a rose of 18%.

As you can see, GDX or gold mining shares tend to exacerbate moved in the gold futures market on a percentage basis. When it comes to leverage, the Direxion Daily Gold Miners Bull 3X ETF product (NUGT) is only appropriate for short-term trading, but it can act as the GDX on steroids on short-term moves.

Most recently, December gold futures moved from a low of $1186 on October 8 to its most recent high at $1236.90 on October 9, a rise of 4.3% over a one-week period. GDX moved from $18.20 to $20.39, an increase of 12% over the same period.

Source: Barchart

As the chart shows, NUGT rose from $12.21 on October 8 to a high of $16.96 on October 15, as the leveraged ETF gained 38.9% over the period. The fund summary for NUGT states:

The investment seeks daily investment results, before fees and expenses, of 300% of the daily performance of the NYSE Arca Gold Miners Index. The fund invests at least 80% of its net assets (plus borrowing for investment purposes) in securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is a modified market capitalization weighted index comprised of publicly traded companies that operate globally in both developed and emerging markets, and are involved primarily in mining for gold and, in mining for silver. It is non-diversified.

NUGT holds leveraged positions in GDX using options and other tools to achieve its triple short-term performance. However, this product suffers from decay and is only appropriate for short-term positions in the market.

Gold broke higher on fear and uncertainty as the stock market hit the skids last week. If the period of volatility continues and the dollar remains around its 95-pivot point, it is possible that gold will attempt to reach higher highs over the coming days and weeks and could even buck the trend of previous years as we head into the final two months of 2018. NUGT is a short-term trading tool that could enhance your intraday and overnight performance in the gold market over the coming weeks. NUGT is only appropriate for traders and investors with very short-term time horizons on market positions.

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.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.