The Return Of Gold's Safe-Haven Demand

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Includes: IAU, UUP
by: Clif Droke
Summary

Gold's safety demand has revived thanks to latest economic fears.

IMF global growth forecast, China demand are boosting gold price.

Gold is inches away from a renewed immediate-term breakout signal.

Just when it appeared that gold’s 7-month recovery was dead, the yellow metal has roared back to life. A failed attempt by the bears at raiding the market has given way to a renewed rally attempt as the metal attempts to push its way back to its March high. In today’s report, we’ll discuss the latest developments which support a return of gold’s safety bid and the eventual resumption of its rising trend.

Gold prices hit their highest levels in more than a week on Tuesday after the International Monetary Fund (IMF) lowered its global economic forecast for this year. The IMF reduced its global growth outlook from 3.5% to 3.3% for 2019. Moreover, data which showed that China’s central bank increased its gold reserves to 60.62 million ounces in March from 60.26 million in February also supported gold’s latest rally.

Gold’s safety bid was first revitalized last week when President Trump said the Federal Reserve should lower interest rates and revive quantitative easing (QE). Trump said the Fed needs to take action in order to reverse the damage he insists the central bank’s tight money policy inflicted on the U.S. economy. The president’s call for QE served as a reminder to some investors that there are potential threats facing the U.S. economy, and this has inspired some renewed demand for the yellow metal.

Indeed, some of gold’s latest rebound can undoubtedly be attributed to increasing safe-haven demand. Yet much of gold’s latest rally attempt is likely the result of short positions being unwound from the last two weeks. While there are no guarantees when it comes to price predictions, a test of gold’s nearest benchmark chart resistance at the $1,330 area (the Mar. 25 high) in the next few days is a distinct possibility.

Shown here is a snapshot of gold’s performance in the months since its recovery got underway last fall. As you can see, the gold price has remained steadfastly above its rising 120-day moving average since first getting above this long-term benchmark trend line in December. As I’ve emphasized in recent reports, as long as the gold price remains above the 120-day MA on a weekly closing basis, the metal’s intermediate-term recovery can be considered intact.

June 2019 Gold Source: BarChart

A more salient point for the immediate-term (1-4 week) outlook is that the June gold futures price has closed above the 15-day moving average as of April 9. This is the first time since last month that gold has managed to overcome this key measure of gold’s immediate strength. Based on the rules of the trading system I employ in this report, a 2-day higher close above the 15-day MA is required to signal an immediate-term bottom for gold. Thus, we could easily see a renewed breakout confirmation for gold by later this week.

What happens if gold closes higher above its Apr. 9 close of $1,308 in the next couple of trading sessions? Aside from triggering a renewed breakout signal, this could also serve as a major deterrent for the bears by encouraging additional short covering. Some analysts are betting on even higher prices if gold overcomes the aforementioned $1,330 level. However, I recommend that we continue to play it safe and wait for the confirmed 2-day higher close above the 15-day MA before initiating new short-term trading positions in gold.

Turning our attention to my favorite gold tracking vehicle, let’s take a look at the graph of the iShares Gold Trust (IAU). The IAU price rose conspicuously above its 15-day moving average on Apr. 9, which the first such time this has occurred in several weeks. After the latest rally, IAU is very close to confirming an immediate-term bottom and subsequent breakout signal per the rules of my trading discipline. All that is now required to confirm a technical breakout for IAU is for the price to close decisively above $12.48, which was Tuesday’s closing price. By closing conspicuously above $12.48, IAU will also have broke out above its more important (and closely monitored) 50-day moving average, thus confirming an immediate-term buy signal.

iShares Gold Trust

Source: BigCharts

Although a confirmed breakout signal in gold and the gold ETF this week would be encouraging from a bull’s perspective, gold’s near-term outlook would be greatly augmented by additional weakness in the U.S. dollar index. Shown here is the PowerShares DB U.S. Dollar Index Bullish Fund (UUP), which is my favorite dollar proxy. A significant pullback in UUP would let us know that the dollar has weakened enough to improve gold’s currency component. This in turn would remove one of the biggest obstacles for a sustained gold rally and would make it far easier for bullion prices to overcome the previous high from February. To that end, a weekly close under the 50-day moving average in UUP (blue line in chart below) would tell us that the dollar’s rising trend has reversed.

PowerShares DB U.S. Dollar Index Bullish Fund

Source: BigCharts

A never-ending stream of worrisome economic headlines continues to prop up gold’s safety bid, and that’s good news for gold’s longer-term outlook. We’ll likely soon have another entry point in gold if the latest developments mentioned here are any indication. A measure of caution is still in order, though, as long as the U.S. dollar index remains buoyant. The strong dollar remains gold’s last remaining headwind in its latest rally attempt.

On a strategic note, traders should remain vigilant in light of gold’s latest breakout attempt. A follow-through higher close above the $12.48 level in the iShares Gold Trust (IAU) this week – especially if accompanied by significant dollar weakness – would potentially provide us with another entry point in this gold ETF. For now, however, no new trading positions are recommended until IAU confirms that an immediate-term bottom has been established. Longer-term investment positions in gold, however, can be maintained since the fundamentals underscoring multi-month recovery effort are still favorable.

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.