Gold: The Last Trough Before The Seasonal Spring Rally Above $2,000

Summary

• From a fundamental point of view, the actions in Washington the past week have been unprecedented.
• However, stocks continue to move up in the face of all the uncertainty politically.
• After the unrest in Washington, there may be another wave of cases from that event.
• We are beginning to see inflationary pressure in the grains.
• Looking for a portfolio of ideas like this one? Members of Mean Reversion Trading get exclusive access to our model portfolio. Get started today »

Fundamentals

January 11, 2021, 7 am PST. Gold is trading last at $1842. It's in a fast market. It is up $7.80. We have been all over the place with a low of $1817. Silver is at $25.08, up about 1.7%. The E-mini is down about 30 points and we seem to have entered into an area of support for the E-mini S&P near the Variable Changing Price Momentum Indicator (VC PMI) Buy 1 level.

Courtesy: Ticker Tocker

From a fundamental point of view, the actions in Washington the past week have been unprecedented. It has created a certain amount of nervousness in the market, which is creating volatility. However, stocks continue to move up in the face of all the uncertainty politically. Political issues appear to have overtaken the pandemic in the news, even as COVID-19 numbers continue to set new records in terms of cases and deaths. After the unrest in Washington, there may be another wave of cases from that event.

The gold market appears to be discounting some of the early buying that came in. Gold tends to suck you in at the extreme above the mean and then revert, as it did from $1862. At $1817, the question is whether this is going to be the floor for the next rally.

The VC PMI daily average price for today for gold is $1,865. It appears to be matching the monthly average of about $1864. Therefore, this is a classic harmonic alignment between the daily and weekly numbers. If gold closes above $1865, it will be extremely bullish for the gold market. The Buy 1 daily level is $1812, which means we are identifying buyers just shy of the expected price to find buyers.

Last week, precious metals had a correction in part because the 10-year note yield went up about 1%. Interest rates rose. This contradicts the Fed’s plan to keep interest rates low or at bay, given the massive debt globally, for as long as possible. If interest rates rise, then defaults will ripple through the system. Rising interest rates also will jeopardize the purchasing power of the US dollar. The Fed really has no choice but to keep interest rates low. If interest rates rose above 1.5% on the 10-year, then the economy would feel the heat and it would not bode well for the tremendous real estate bull market that we have seen. There could be a major collapse if interest rate rise.

Gold at $1962 was a monthly VC PMI target. Gold reached that level and then supply came into the market with a lot of short selling, which was largely paper supply. Central bankers have the largest short position. They have added about 13,000 contracts on the short side of the market, which are all paper supply. The market came down from the monthly VC PMI Sell 1 level of $1950 to the monthly extreme below the mean of $1817. The annual number is $1810 for the VC PMI. We might have seen the lows at $1817. If we get back above $1864, that will confirm that the lows were set into place. $1865 will bring in the daily and monthly, while above $1880 will bring the weekly, too. We are seeing a head and shoulder bottom formation. There are no trades for day traders today, but it's neutral to bullish. If gold trades above $1865 or $1880, then we can recalibrate. In the meantime, we want to be long the market and add to positions, as the VC PMI is looking for the completion of this correction short-, intermediate and long term.

Inflation in Grains

We are beginning to see inflationary pressure in the grains. Soybeans hit 1388. Soybeans went from about $8 a bushel in March to about $14 a bushel now. That is a huge indicator of inflation in food, since soybeans are used in so many foods. We are moving into an inflationary period. That increase will be reflected in retail prices in the summer. With the lockdowns, we are cutting supply by hindering the supply chains. With everyone tired of lockdowns, when they are lifted and when vaccines start to have an effect, demand will come back into the system in a major way. This is likely to trigger inflation as demand soars and supply remains constricted due to supply chain issues. With inflation in grains, we will expect the dollar to be worth less and precious metals to be worth more. Therefore, we are building positions in precious metals.

The Feds may have to cap the 30-year bond rate at 2%, especially if inflation really hits. If you look at shadowstats.com, it shows that we are already dealing with high levels of inflation. The site tracks the real economy, not questionable government statistics. It's difficult to determine how damaged the economy is right now, as we are still in a sense, in the eye of the hurricane of the pandemic.

Gold hit $1817, which is where buyers started to come into the market. The VC PMI says that this level is where it is highly probable that buyers will come into the market and the market will revert after the correction Friday. This is an excellent time to accumulate gold positions long term. Gold is going much, much higher. There's no doubt with all of the issues economically, politically and socially. Shorter term, we expect gold to hit $1880.

GBTC Bitcoin Investment Trust

The Grayscale Bitcoin Investment Trust hit a high of 48.65. Now it appears a major top has come into Bitcoin, as traders and investors seek an alternative to the US dollar. Fear drove a lot of money into Bitcoin, but it was a big mistake. Bitcoin is not going to replace gold or the dollar. We recommend trading Bitcoin and buying gold long-term. All the money you make day trading Bitcoin, put into gold in some form, up to about one third of your net worth. That will protect you in the long run as we go into the decline of the US dollar. More and more printing of the US dollar will continue to erode the value of the US dollar. Gold could go to $30,000, just as Bitcoin did. Bitcoin hit $30,000 in an uncontrolled environment. Gold could easily go to half that amount or more. Every time gold dips, buy gold. We are still surprised that metals are so cheap given the fundamentals. It's a golden opportunity to build a long-term position in precious metals.

Analyst’s 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.