GOLD – Higher, Then Lower, Then Skyward – David Brady

GOLD – Higher, Then Lower, Then Skyward – David Brady for Sprott Money

FUNDAMENTALS

The recent 20% dump in stocks triggered growing expectations of a Fed reversal in monetary policy back to interest rate cuts and QE. To the extent that the nascent rally in stocks since the start of the year continues, those expectations are likely to recede and put pressure on Gold.

The Fed is “talking” dovish, but its purpose is hawkish: to push stocks higher in order to enable further rate hikes. Higher stocks and the increasing risk of higher interest rates are likely to weigh on Gold in the near future.

Ultimately, the Fed will be forced to reverse policy to avoid a collapse in stocks, which will contribute to dollar weakness, triggering a massive rally in Gold.

U.S.-China trade talks are unlikely to be resolved voluntarily, because President “Xi will NEVER allow the U.S. to dictate China’s domestic policies.” The pattern right now is that optimism grows ahead of trade talks, USD/CNY falls and Gold rises, only for disappointment to follow because nothing substantive has been agreed upon, and USD/CNY rises, Gold falls. A lot of optimism has already been priced into USD/CNY that is likely to be reversed soon.

TECHNICALS

Gold has rallied ~$130 off its August 16 low and could go higher, but the risk/reward increasingly favors at least a short-term pullback.

That said, the trend is clearly up. Only a break of the recent low at 1278 followed by a lower high would change that.

Daily

  • Gold is in a steep channel higher, with resistance at 1310 and support at ~1278.
  • The 200-day moving average is currently at 1255.
  • Gold peaked at an RSI of 74 when it hit 1300 recently. It is still extreme overbought.
  • There is also the risk of a negatively divergent higher high between 1300-1318 on the RSI and both MACDs.

Weekly

  • Gold is now running up against former trendline support, now resistance, since its low in December 2015 (purple line). That resistance is currently at ~1308.
  • At an RSI of 65, it is overbought and close to extreme overbought.
  • The MACD Histogram is at its highest since the spectacular rally in the first half of 2016.
  • The MACD Line is powering up from its low in September last, but there is a gap between it and its signal to allow for at least a pullback before going higher again.

FIBONACCI LEVELS

1318 Close = 76.4% of 1360 to 1184 on a closing basis.

1318 = 76.4% of 2016 High at 1377 to December 2016 low of 1124.

1322 = 76.4% of 1369 to 1167 on an intraday basis.

23.6% and 38.2% Fibs of the current rally are at 1270 and 1250.

SENTIMENT

The spot DSI, currently at 59, means the risks are relatively balanced here. However, the trend is clearly higher, demonstrated by the 21-day moving average.

POSITIONING

Given the partial Government shutdown, we have not had any updated reports since December 18. However, given that the price is ~$40 higher since then and Funds were racing to get long at the time, it is reasonable to assume that they have continued to add to those longs. The question is, how long are they and how fast have they been adding to their position? We won’t know until we get new data.

It was notable that the Commercials, and specifically the Banks, were racing to get short back on December 18 and have likely increased those shorts also.

INTER-MARKET ANALYSIS – XAU/CNY & USD/CNY

Although Gold has risen against all major currencies recently, Gold in dollar terms (XAU/USD) and in yuan terms (XAU/CNY) have been fused at the hip since both of them bottomed on the same day, August 16. This makes sense, given that USD/CNY has been in a tight range between 6.78 to 6.98 since then.

The formula XAU/USD = XAU/CNY divided by USD/CNY effectively becomes XAU/USD = XAU/CNY as long as USD/CNY remains in a tight range.

Like XAU/USD, XAU/CNY has soared since August, but it became extreme overbought on January 3 with an RSI of 78. As expected, it has fallen back since. The risk now is negatively divergent higher high to ~9000, signaling a potentially sizeable pullback. This matches the scenario laid out on the daily Gold chart above.

Switching to USD/CNY: As I mentioned earlier, it has remained in a relatively fixed range of 6.78-6.98 since August, but it has fallen to the bottom of that range recently and is extreme oversold with an RSI of 31. It has also hit a positively divergent lower low relative to its low on December 4, when the RSI fell to 30. It could continue to fall, but the risk is that USD/CNY rises while XAU/CNY falls, a toxic combination for XAU/USD, and would certainly contribute to a pullback in Gold.

What could be a catalyst for a rise in USD/CNY? Disappointment (again) with the news from the trade talks?

CONCLUSION

The overall trend in Gold is clearly higher. However, it is running into strong resistance after a long rally and is extreme overbought on multiple indicators. There is the risk of a negatively divergent higher high and pullback to follow. This can be clearly seen in XAU/CNY terms also. The fundamental backdrop also supports a pullback in Gold, to the extent that stocks continue to rise and expectations for further rate hikes increase and those for a Fed policy reversal recede. Another disappointing outcome from the U.S.-China trade talks could also cause a pop in USD/CNY.

The only caveat to this conclusion would be a precipitous drop in the dollar against all currencies, which would obviously benefit Gold also.

On balance, based on the data available to us, the risk/reward clearly favors a pullback following a negatively divergent higher high. The question is, how low do we go? What is more certain is that this will be the final opportunity to get long Gold (and Silver), given the rally that is to follow once stocks peak and complete the third and final leg of their crash. Gold is not only the new “TINA” (there is no alternative), but if we do get a reversal in Gold, there is no better place to “BTFD”.

Source – References – Sprott Money

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Sprott Money

Various authors presenting analysis and commentary on the precious metals, economy and precious metals mining markets.