Gold Gets Fear Boost, But Needs More Support

by: Clif Droke

Gold shows more improvement as trade war fears increase.

But gold's leading supports, including silver, are still weak.

XAU index is also very weak and hasn't confirmed gold's latest rally.

The gold price has received a much-needed safety bid since last week, and this has sufficed to keep the metal’s price above its recent four-month low. But as we’ll discuss in today’s report, more is needed – a lot more – before a buy signal is confirmed. Specifically, what gold needs is the support from its closest allies, including silver and the gold mining shares. Until this support is forthcoming, the latest immediate-term bottom signal for gold is likely to be tenuous and short-lived.

Gold prices finished higher for the latest week, no small feat given the extended stair-stepping downward path the metal has taken since February. The June gold futures price (below) also managed to do something it hasn’t done successfully since March: it closed two days higher above its 15-day moving average without immediately reversing this signal. Long-time readers of this report should know that I consider a 2-day higher close above the 15-day MA as a confirmed immediate-term (1-4 week) bottom signal. Thus, gold has at least technically confirmed a temporary end to the slide which has plagued the metal for the last two-and-a-half months.

June 2019 Gold

Source: BigCharts

The latest rise in the gold price, despite its shallowness, was also supported by a corresponding decline in the U.S. dollar index. The dollar’s rise has been almost as relentless as gold’s decline since February, which is reflected in the latest graph of the Invesco DB U.S. Dollar Index Bullish Fund (UUP). The dollar ETF has violated its 15-day MA, which also confirms the dollar’s immediate upward trend has been broken. This should provide a measure of breathing room for gold since it means the metal’s currency component is now a bit stronger than it was a couple of weeks ago. The longer the dollar index remain under its 15-day MA, the greater the opportunity the gold bulls will have to fully regain control over the metal. With enough consolidation, gold will eventually be able to overcome the next major obstacle standing in the way of a sustained rally.

Invesco DB U.S. Dollar Index Bullish Fund

Source: BigCharts

The obstacle which I’m referring to is the widely followed, and psychologically significant, 50-day moving average. It’s signified by the blue line in the following graph of the iShares Gold Trust (IAU), my favorite gold-tracking vehicle. I haven’t been able to make another buy recommendation in IAU in quite some time due to the lack of short-term technical and fundamental strength in the gold market. Although IAU has closed the requisite two days higher above its 15-day MA, it remains below the more important 50-day MA on a weekly closing basis. I don’t necessarily need to wait for a weekly close above the 50-day MA before initiating a new gold long position. However, it would certainly increase the probability of a sustainable gold rally if a breakout above the 50-day MA was accompanied by additional strength from gold’s leading support team. Let’s examine those supports right now.

iShares Gold Trust

Source: BigCharts

The first support for a healthy gold market is a strengthening price of silver. While silver isn’t always a leading indicator for gold, in almost every instance where gold has trended higher for more than a few days, the silver price has confirmed a gold rally. In fact, I consider the failure of silver to confirm gold price strength as a negative divergence. More to the point, when silver fails to follow gold higher it usually means there is no broad institutional investment demand for either metal. Instead, a gold rally which isn’t joined by silver is normally a temporary, fear-driven event on the part of small investors which tends to quickly reverse once the fear in question has abated.

As can be seen in the graph of the iShares Silver Trust (SLV), my favorite silver proxy, the silver ETF hasn’t yet closed above either its 15-day or its 50-day moving average. Until we see at least a 2-day higher close above the 15-day MA to confirm an immediate-term bottom for SLV, I’ll continue to view the latest gold rally attempt with some suspicion.

iShares Silver Trust

Source: BigCharts

Another indication that gold’s latest turnaround attempt is based primarily on fears over the latest U.S.-China trade war escalation can be seen in the fact that the Thomson Reuters/CoreCommodity CRB Index (CRB) remains in a downward slope. The CRB is the benchmark for the broad commodities market, and gold has historically been at its strongest when other commodities are rallying as well. Right now, however, commodity prices categorically remain subdued which further reflects a lack of institutional commitment for the yellow metal. Gold is most favored by money managers when the outlook for overall commodity price inflation is rising. To buy gold when silver and other commodities are in a slump is to speculate that investors’ news-driven fears will remain strong for an extended period. And as experienced participants should know, fear is the most ephemeral of emotions.

Thomson Reuters/CoreCommodity CRB Index

Source: BigCharts

A final consideration for gold is the lack of support from the actively traded, U.S. and Canadian-listed gold mining and exploration company shares. As the following graph shows, the PHLX Gold/Silver Index (XAU) continues to struggle under the weight of sustained selling pressure in the gold mining stocks. In fact, the XAU has just made a new low for the year to date as of May 10 and shows no sign of bottoming yet. While it would be a mistake to conflate the strength or weakness of the gold mining stocks with that of the gold price, a major decline in the XAU index has often served as a warning for gold investors in the past. It’s certainly preferable, based on past performance, for the gold stocks to confirm a rally in the gold price. Until we at least see a bottom in the XAU, I recommend that we wait before jumping onto the gold buyer’s bandwagon.

PHLX Gold/Silver Index

Source: BigCharts

Although the prospects for an immediate-term gold rally are higher now than they’ve been in several weeks, there still isn’t enough evidence to justify buying a new short-term trading position in the metal. An increase in gold’s safety bid has certainly helped pave the way for a short-term gold bottom, and seasonal demand from the top-consuming India could also improve gold’s prospects in the coming weeks. But we still need to see some additional weakness in the U.S. dollar index to let us know that gold’s currency component has weakened enough to allow the metal to rally unencumbered.

We also need to see increased strength in the silver price along with a bottom in the leading gold mining stocks to let us know that gold demand is broadly based and not simply a result 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.