Gold Gets A Lift But Faces Stiff Competition

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GHS, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, SLV, TLH, UBG, UGL, UGLD, UUP
by: Clif Droke
Summary

Gold is benefiting from latest U.S.-China trade war fears.

Demand for other safe havens is eclipsing gold, however.

Gold needs additional support from weaker dollar, stronger silver.

After weeks of not having a meaningful safety bid, gold is finally seeing a pickup in interest among safety-conscious investors. The latest pullback in global equities has certainly helped, and gold has been responsive to the revived fears of an all-out trade war with China. But as I’ll explain in today’s report, gold still faces strong competition from other safe havens like U.S. Treasuries. The metal’s currency component, moreover, is still too weak to support a sustainable rally. Both of these factors combined suggest that gold still has plenty of work ahead before it launches its next major upward trend.

The June 2019 gold futures price climbed $18/oz. on Tuesday in the wake of increased volatility in the U.S. equity market. The sell-off in the stock market was catalyzed by the Trump administration’s latest announcement that it would increase tariffs on $200 billion in Chinese goods. U.S. officials stated that tariffs will rise from 10% to 25% on Friday at 12:01 a.m. Eastern time.

While gold has benefited from the latest headline fears, investors have been somewhat disappointed by the lack of meaningful rallies in the gold price despite the significance of the increased trade tensions. Some analysts believe, however, that gold will benefit from increased geopolitical fears and higher demand from India as well as seasonal factors. That remains to be seen, but for now, gold’s best bet for a sustainable rally is a reversal of the upward trend in the U.S. dollar index. This has been the single biggest fundamental obstacle blocking gold’s recent rally attempts.

Below is the Invesco DB U.S. Dollar Index Bullish Fund (UUP), my favorite dollar index proxy. Although the gold and the gold ETF have both managed a close above the 15-day MA, the dollar ETF hasn't yet closed under its 15-day MA as you can see here. This suggests that the dollar's immediate-term (1-4 week) upward trend is still technically intact and hasn’t reversed yet. More significantly from both a technical and a psychological standpoint, the dollar ETF remains above its rising 50-day moving average.

Invesco DB U.S. Dollar Index Bullish Fund

Source: BigCharts

As long as the dollar index is rising, the gold price will remain vulnerable to currency-related headwinds. And while a counter-trend gold rally isn’t out of the realm of possibility – especially if U.S.-China trade war fears escalate – at least some of the wind needs to come out of the dollar’s sails to give gold its best chance for completely recouping its losses since February.

If there was any doubt that the latest gold rally attempt is strictly driven by short-term safe-haven interest (as opposed to genuine investment demand), the following chart exhibit should lay that doubt to rest. The silver price has not only failed to close above the 15-day moving average yet, but silver is conspicuously lagging gold’s price performance. The chart below compares the recent performance of the iShares Silver Trust (SLV) with the popular SPDR Gold Shares ETF (GLD). Until the silver ETF closes two days higher above its 15-day MA, it must be assumed that silver hasn’t yet confirmed an immediate-term bottom. Silver should also ideally lead, or at least closely follow, the gold price higher when the yellow metal is decisively in the bulls’ control. Silver’s lagging performance is another cautionary sign that gold isn’t firing on all cylinders yet.

iShares Silver Trust vs. SPDR Gold Shares ETF

Source: BigCharts

Although gold’s currency component remains weak, its fear component is gaining in strength. In response to the latest trade war threat, gold has been higher in the last two trading sessions and has even managed to close decisively above its 15-day moving average for the first time since April. Based on the rules of my technical trading discipline, gold is on the cusp of confirming its first immediate-term bottom since earlier this year. That would be a small-but-important first step in the bulls’ attempt at reversing the damage inflicted on gold since the February peak.

The chart below shows that June gold is above its 15-day MA, but is still under its far more critical 120-day MA. The latter is the moving average I use to delineate gold’s dominant intermediate-term (3-6 month) trend. As I’ve explained in past reports, the historical correlation shows that when the gold price is above the 120-day MA on a weekly closing basis the outlook tends to favor the gold bulls. If June gold can manage to close above $1,293 by this Friday we’ll have the first meaningful intermediate-term bottom signal since last December.

June 2019 Gold

Source: BigCharts

While we’re on the subject of gold’s fear component, the dollar isn’t the only thing standing in the way of a full recovery for the yellow metal. Another major safe haven, namely U.S. government bonds, have so far benefited the most from the latest outbreak of worry on Wall Street. Shown here is the iShares 10-20 Year Treasury Bond ETF (TLH) which serves as a useful proxy for U.S. Treasury bond prices. As you can see, T-bonds have benefited from investors’ increased apprehensions over the global trade outlook. The bond ETF has rallied even more vigorously than the gold price in recent sessions and is outperforming gold from a relative strength standpoint. The competition from Treasuries will likely continue to blunt gold demand to some extent in the immediate term.

iShares 10-20 Year Treasury Bond ETF

Source: BigCharts

Gold’s near-term prospects certainly look better now than they have in the last few weeks. An increase in gold’s safety bid has helped make the case for a gold bottom, and seasonal demand from the top-consuming India could also improve gold’s prospects in the coming weeks. Until the dollar has reversed its immediate-term upward trend, however, investors aren't justified in assuming that the gold price is ready for lift-off.

Along with a weaker dollar, we should also ideally see increased strength in the silver price to let us know that demand for the precious metals is more broadly based and not simply a consequence of ephemeral trade war fears. Until we see the above-mentioned improvements, the yellow metal is likely to encounter strong headwinds in the immediate term. Accordingly, a defensive position is still warranted with no new long positions in either bullion or gold ETFs recommended for now.

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.