Gold Set On A Path To A New Bull Market?

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GHS, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Topdown Charts
Summary

The technical setup and shifting macro currents place gold in possibly one of the best positions to perform since the bear market began.

Gold still faces a couple of major tests, and the resistance zone of ~1380 is going to be the major line of departure for a possible new bull.

Macro catalysts include the Fed policy pivot and a possible end to the US dollar bull market.

Short-term risk aversion and positive technicals may take it higher.

In case you missed it, gold (GLD) has finally managed to stage a decent rally. Through the turmoil and tumult of the trade war escalation, gold had been reluctant to move as US dollar strength kept a lid on things, but there's a few key moving parts that investors should be thinking about which could clear the way for gold to potentially embark on a new bull market.

The chart of today comes from last week's macro themes report, where I covered the outlook for the gold price (I also covered Silver, but that's a separate matter altogether!).

The chart shows the gold price, a couple of key lines which I'll talk about in a second, and a slightly unusual take on gold futures positioning.

Firstly, on futures positioning, what I am showing here is the difference between the standardized (vs open interest) net-speculative futures positioning in gold vs the US dollar index. The point of doing this is that we're dealing with gold in USD terms here, so it kind of makes sense to bring in both the gold and DXY futures positioning to present a sort of 2-sided view on the situation. Satisfyingly, it actually results in a more bounded and intuitive signal as you can see in the chart.

On that indicator, it is currently presenting a contrarian bullish signal, and the higher low is confirming the higher low in price.

Now on to those interesting blue lines. Honestly, they should be pretty self explanatory, but let's go through them.

The most important one is the thick blue line which denotes the major overhead resistance level (or zone... you could probably say the key level is 1380 but you could also say it's 1370 or 1390). The bottom line is, that for gold to enter into a new bull market it needs to break through that zone/level. If and when it gets there, I can almost guarantee you that something critical has changed in the global macro system (I will talk about this shortly).

The other line is that upward sloping narrower blue line, which is basically (loosely) forming a multi-year ascending triangle. These formations are typically bullish, but they usefully set a couple of key lines in the sand (a break to the downside = bearish, upside = bullish). Those formations are useful in identifying major turning points and the beginning of new market regimes.

So we know a few things from this chart: positioning looks bullish, the ascending triangle is typically bullish, and the key line in the sand or line of departure for a new bull market campaign is that circa-1380 zone.

I've noted elsewhere that it's probably worth treating it with benign skepticism until it actually does break out. A key reason for this is that you can clearly see a series of failed attempts to break through that key level. Indeed, some traders might even be tempted to fade the rally if it approaches that level. But I think you can have a degree of confidence in the assertion that if it does breakout it will likely just keep on going.

As for the macro picture, or what's changed/changing. The path of the US dollar is obviously one of the major variables here, and on that note (as I mentioned in the top 5 charts of the week), the consensus is swiftly shifting to expect Fed rate cuts in the near term. Historically a transition from rate hikes to rate cuts has precipitated a correction and/or bear market in the US dollar.

A bear market in the US dollar would be more or less unequivocally bullish for gold. And in fairness, if something pops out that makes the US dollar rally - that's probably going to be the major driver of downside risk for gold too.

So with rising uncertainty on the economic outlook, and a growing consensus for Fed rate cuts, a tired looking US dollar could well be the last line of defense for gold to break through.

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This article originally appeared as a submission at See It Market

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. I have no business relationship with any company whose stock is mentioned in this article.