Gold Is Back

Oct. 31, 2019 2:27 AM ETGLD, IAU, PHYS, SGOL, UGL, DGP, UGLDF, GLL, DZZ, GLDI, OUNZ, DGL, DGZ, DGLD, UBG, QGLDX, PHYS:CA32 Comments24 Likes

Summary

  • In August, gold prices reached their highest level in six years. Low interest rates should continue to support gold.
  • China's appetite for gold-backed ETFs reached extreme highs too.
  • Here are three technical reasons why gold prices should keep advancing in the near future.
  • This idea was discussed in more depth with members of my private investing community, The Lead-Lag Report. Get started today »

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

- Alan Greenspan

Gold is back in fashion this year. Economic and geopolitical uncertainty, coupled with low interest rates, continues to fuel demand.

A recent Lead-Lag Report mentioned that gold ETFs have seen their most significant quarterly inflows since 2016. In August, gold price reached its highest level in six years.

To be precise, the amount of gold held by gold-backed ETFs surged to record highs in September. The World Gold Council (WGC) estimates that about 2.8k metric tons of gold were held in gold ETFs in September, the strongest increase month to month since 2016.

And it’s not only an American story. Funds listed in Europe and elsewhere joined the party as well.

Moreover, China's appetite for gold-backed ETFs reached extreme highs too. The AUM of Chinese gold ETFs sits at all-time-highs around 17 billion yuan, roughly $2.2 billion.

To continue on the same lines, the official Chinese demand for gold didn't stop in the last month. China's gold reserves continued to grow, adding another 95.8 tons to its reserves in 2019.

It appears that there's a strong demand for both paper and physical gold. Here are three technical reasons why gold prices should keep advancing in the near future.

First, let’s have a look at the bigger picture. This is a twenty-year weekly chart beautifully showing the parabolic advance before and after the 2008 financial crisis. What followed is a correction, badly needed from a technical point of view.

But the 2013-2019 consolidation looks like a classic rounding bottom pattern, a bullish reversal pattern known for the fact that it is time-consuming. Well, six years did the job.

Second, if the rounding bottom is not enough, classic support and resistance analysis shows resistance broken by the recent move higher. $1350 did a great job of capping any potential advance for the past years until 2019’s break higher.

Third, another argument for a bullish break higher is the fact that the consolidation also looks like an inverted head and shoulders pattern - a massive one!

This is a point I also made some time ago. The break above $1350 triggers the run for the measured move to $1700. Once there, the proximity to the 2011 highs naturally attracts more interest. Probably we’ll see some profit-taking by the time $1700 comes, but that’s likely to be just a consolidation.

For price action ideas, it is always best to go on the lower time frames. Below, there's the price action that led to the break of the six-year long consolidation.

To start with, gold advanced and formed a bullish flag for the first two quarters of 2019. The projected measured move, judging by the flag’s poll, came at about $1425, well above the all-important $1350 level. Next, gold formed a triangle as a continuation pattern before stalling at $1550.

One can't ignore the potentially bullish flag (yes, another one) forming for the past two months. A break higher opens the gates to the projected measured move of the inverse head-and-shoulders pattern mentioned earlier.

So, how do you trade it? Wait for gold to make new highs, while the flag’s structure remains intact. That’s the entry point, with a stop at the lowest point in the flag’s consolidation and targeting $1700.

Any competent analysis has a dual point of view - fundamental and technical. When both of them point to the same direction, it explains why gold is back in fashion.

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This article was written by

Michael A. Gayed, CFA profile picture
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