Gold Enthusiasts Don't Like Hearing This

|
Includes: AAAU, ASA, BAR, DGL, DGLD, DGP, DGZ, DUST, DZZ, GDX, GDXJ, GDXS, GDXX, GGN, GLD, GLDI, GLDM, GLDW, GLL, GOAU, GOEX, IAU, IAUF, JDST, JNUG, NUGT, OUNZ, PHYS, QGLDX, RING, SGDJ, SGDM, SGOL, UBG, UGL, UGLD
by: ANG Traders
Summary

All markets, especially gold are driven by the emotion of fear.

Fear leaves repetitive patterns in the pricing history.

The recent rally in gold has yet to change the patterns that imply lower gold prices in the future.

All markets are driven by the emotion of fear - fear of losing and fear of missing out (greed) - and it is hard to think of a more emotional investment than gold. It has been the 'go-to' refuge from recessions and from inflation since the beginning of modern times. In this piece, we argue that the recent rally in gold is not the beginning of a new bull market in gold because the causative fear is irrational, there is no recession around the corner, and the trading patterns of gold support that view.

As we have pointed out before here, the emotional life of gold traders leaves "footprints" in the pricing history of gold in the form of repetitive patterns. This recent bounce in the price of gold has not altered the patterns we have been monitoring.

Gold, Silver, And Copper

The correlation between gold and silver is normally strongly positive; however, in 2012 and again in 2018, the correlation dropped suddenly before recovering. Both gold and silver seem to be replicating the pricing pattern that formed during the 2012-2016 period. Last week's bounce in gold and silver prices continue to fit within the pattern (chart below).

The same can be said for the correlation between gold and copper, while not as strongly positive as with silver, it is still positive on average. The similar patterns in the price and in the various momentum indicators of copper and gold continue to replicate as during the 2014-2016 trading period, despite the drop in copper (chart below).

2013-2014

In 2013, the 20-week MA crossed under the 200-week MA unleashing a zig-zagging, downward-sloping price pattern in gold that has been replicating since the middle of 2018 when the moving averages once-again crossed over. The recent bounce in gold fits with this pattern, and we think that the fear trade that took gold higher is almost exhausted and that resistance at $1,350-1,360 and $1370 will turn gold around and continue the pattern replication (chart below).

Here is a closer look at the 2013 pattern.

Notice the similarity between 2013 and 2019 (chart below).

Rates and the Dollar

Gold's fear trade was caused by lower rates and a lower dollar. We think that the pullback in both rates and the dollar is almost complete, and after some possible further slippage is likely to reverse (chart below).

USD/JPY

The USD/JPY ratio correlates negatively with gold. The stochastic is now in oversold territory and is likely to turn higher soon. There may still be some fear-induced upward pressure on gold, but the technical position of the USD/JPY ratio makes it likely to be short-lived; we expect the ratio to rise and the gold price to drop (chart below).

The Technical Take

Technically, gold is over-extended:

  • RSI is in overbought territory.
  • MACD is elevated.
  • Stochastic is at overbought levels.
  • +DI of the ADX is elevated.
  • Gold price has strong resistance at $1,350-1,360, and $1,370.

If gold closes above $1,370, however, then the probability of further gains increases greatly (chart below).

In summary: Gold's fear trade may continue for a few more days, but the technical posture and pattern replication is predicting a turn down in gold prices soon.

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.