Gold Still Feeding On Global Fears

Includes: GDX
by: Clif Droke

Gold's forward progress has slowed and consolidation will continue.

Economic and geopolitical fears will continue to support the metal.

Expect a slowdown in gold stock rally, but the main trend is still up.

The same fear which galvanized investors into buying gold still hangs thick in the air despite the well-received trade-related news on Wall Street. While the U.S. and China have agreed to continue trade talks, thereby keeping hope alive for equity traders, gold remains in demand as participants still worry that the global economy is slowing. As I’ll explain in today’s report, these lingers worries will bolster gold’s “fear factor” and keep the metal buoyant during the anticipated consolidation period in the weeks ahead.

Last week's news that President Trump and Chinese President Xi Jinping agreed to resume trade negotiations was greeted with great fanfare among equity traders. This was seen in the latest rally to new highs in the U.S. stock market, but the news also resulted in profit-taking in gold and silver early last week. The yellow metal came roaring back, however, and by July 5 the gold price was showing stability as investors concluded that threats to the global economy remain.

The gold price stopped short of breaking below its 15-day moving average after last week's pullback. That’s a good indication that the bulls still control the immediate-term (1-4 week) trend and are fighting hard to keep it. But while gold remains above its 15-day MA, there has clearly been a loss of the forward momentum which propelled gold to great heights in June. This can be seen in the following graph, which shows the continuous contract gold price (GC00) struggling to find support above the 15-day MA and failing to establish a new high on a weekly closing basis as of July 5. The loss of gold's immediate-term momentum increases the odds of a pullback, or at least a continued "pause that refreshes," in July.

Gold Continuous Contract

Source: BigCharts

In the last week of June I made the case that gold would likely settle into a trading range and spend at least a couple of weeks consolidating its gains made during the June rally. That has so far been the case for gold, as the metal has been unable to decisively overcome the $1,425 level. This is the price level which many traders and investors view as being the nearest pivotal benchmark for gold. While there may not be anything particularly salient about this number, the fact that so many participants have focused on it has provided it with a psychological significance. This makes it more likely that the $1,425 level will serve as the upper boundary of gold's trading range, at least in the coming days.

While gold's forward price momentum is slowing, the metal isn't entirely without support. Although the previously sour U.S.-China trade relations have been placed on the back burner, a new threat to global trade has emerged to take its place. President Trump has threatened new tariffs on goods from the European Union. According to reports, U.S. wants to implement $4 billion in tariffs on European goods as part of a dispute with the EU over Airbus-Boeing. This new tariff proposal has consequently bolstered the intermediate-term outlook for safe havens like gold and should help establish the lower boundary of gold's trading range in the coming days. Where exactly this lower boundary will be is open to conjecture, but my best guess is that gold will find price support well above its 50-day moving average which is currently at the $1,325 level.

It was also revealed last week that U.S. manufacturing activity has declined to almost a 3-year low as of June. Factor orders fell for a second consecutive month due to U.S.-China trade war fears.

Meanwhile, German industrial orders fell in May, and the country's Economic Ministry said that this segment of Europe's largest economy would likely struggle for months. The latest batch of U.S. economic data also showed that U.S. construction spending unexpectedly fell in May. Investment in private construction projects dropped to a 2 ½-year low, according to the Commerce Department.

On the geopolitical front, tensions continue to mount after the U.S. accused Iran of attacking tankers in the Gulf of Oman last month. In view of these factors, there are plenty of reasons for investors to feel nervous about the state of both the U.S. and the global economy. As long as these anxieties persist, gold will have plenty of fuel for its fear component and should be able to remain buoyant above its 50-day moving average on a weekly closing basis. This in turn provides us with confirmation that gold’s dominant intermediate-term (3-6 month) trend remains bullish.

Gold’s currency component also remains supportive of the metal’s intermediate-term rising trend. The U.S. Dollar Index (DXY), despite a powerful rally to end the first week of July, hasn’t yet closed above its 50-day moving average on a weekly basis. This technically confirms that the dollar’s intermediate-term-trend is still down and hasn’t reversed yet. For now, the dollar's strength poses no significant threat to gold’s intermediate trend.

U.S. Dollar Index

Source: BigCharts

On the mining stock front, meanwhile, gold stocks continue to experience the beneficial tailwind of rising internal momentum. Below is the 4-week rate of change oscillator of the new highs and lows for the 50 most actively traded U.S.-listed gold stocks. This indicator reflects the internal condition for the miners as a group and points the way for the near-term path of least resistance for gold stocks. As long as this indicator is in a rising trend, I recommend that we maintain our existing long position in the gold stock ETF.

Source: NYSE

I would point out, however, that based on my latest rate of change projections there will likely be a notable slowdown in the forward progress made by the gold stocks in the weeks ahead. I’ll have more to say about this in coming reports. While this indicator still confirms that the bulls control the immediate trend for the mining shares, I don't recommend that any new long positions be initiated in the gold stocks. Traders should also raise stop-loss levels on their existing long positions.

In summary, the gold market is recovering from its overheated technical condition in June and will likely continue to consolidate its gains by establishing a lateral range in the coming weeks while remaining above the 50-day moving average. Moreover, gold stock internal momentum remains favorable for the bulls, although I expect a slowdown in the rate of change in July. In view of these favorable factors, investors are still justified in maintaining a bullish intermediate-term bias toward gold mining shares, as well as toward physical gold and silver. However, I don’t recommend initiating any new long positions in the metals sector until the market has completed its consolidation phase.

On a strategic note, I’m currently long the VanEck Vectors Gold Miners ETF (GDX). After the latest rally to new yearly highs in GDX, I recommend raising the stop-loss on this trading position to slightly under the 24.00 level on an intraday basis. Participants who haven't done so should also book some profit in GDX after its impressive run of the last few weeks. Investors can also maintain longer-term investment positions in gold and gold ETFs, as previously mentioned.

Disclosure: I am/we are long GDX. 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.