Gold – Healthy Pullback or Escalation Until Midsummer?
Gold and silver prices experienced quite a roller coaster ride over the last few days. Given the fast recovery on Friday we see two potential scenarios for the precious metal markets to unfold. Gold – Healthy Pullback or Escalation Until Midsummer?
The double low at US$1,676 in mid-March and at US$1,678 at the end of March marked the end of the eight-month correction in the gold market. In the past two months, gold was able to recover from this double low by a whopping US$240. Our conservative recovery targets of US$1,785 and US$1,855 were quickly achieved. Furthermore, gold continued its recovery until US$1,916 so far.
Over the last two weeks however, the bulls (despite various attempts) failed to recapture the psychological US$1,900 level. Not surprisingly, a fast pullback brought prices back to US$1,856 on Friday early morning in the Asian markets. From here, gold came roaring back to US$1,895 as the latest non-farm payroll US job data missed expectations later during that day.
Silver acting stronger than gold
The silver price, on the other hand, was able to hold up somewhat better than the gold price during the entire correction since last august. However, once the attack on the resistance zone around US$30 failed at the beginning of February, silver prices got beaten down together with the falling gold price. Accordingly, Silver reached its low on March 31 at US$23.78. But in contrast to gold, this level thus marked a higher low within the correction that began on August 7th. Currently, silver is trading just below US$28 keeping eye contact with the crucial hard resistance zone around US$30.
Overall, thanks to the significant recovery over the last two months, the picture for the precious metals sector has improved significantly. The healthy pullback has been completed. The bull-market is intact. The question now remains how much time gold and silver will need to break out to new all-time highs and what type of pullback(s) we are going to see during the run up to new all-time highs.
Technical Analysis: Gold in US-Dollar
Weekly Chart – Clear Breakout from the Downtrend Channel
On the weekly chart, gold prices had managed to easily jump above the downtrend line of the previous nine and a half months in mid of May. Thus, the correction, which began with the new all-time high at US$2,075 on August 7th, 2020, has now most likely ended. Ultimately, this healthy correction seems to have unfolded in a bullish flag pattern.
At the same time, gold has been reaching the midline of the three-year uptrend channel (currently around US$1,920). In addition, the 61.8% retracement of the correction at US$1,923 has been missed so far. Thus, the zone between US$1,920 and US$1,925 remains a strong hurdle. If the bulls would manage to break through US$1,925 a quick rally towards the next resistance zone around US$1,950 to 1,960 is extremely likely. This zone around US$1,960 however is a concrete resistance as gold had failed miserably in early November and early January at this level.
Overall, the weekly chart is bullish with a slightly overbought stochastic. But there aren’t any signals pointing to a pullback or a trend change here. In fact, the bullish momentum makes the continuation of the rally towards US$1,960 quite likely. If on the other hand the pullback from last week gains strength, expect a target zone of US$1,820 to US$1,845. Here, a very good buying opportunity would probably arise shortly before the seasonally best time of the year.
Daily Chart – Stochastic With A Fresh Sell Signal
On the daily chart gold had to weather a quick pullback last Thursday and early Friday morning. This pullback led prices back to the upper edge of the former downtrend channel, hence testing the resting breakout. So far, bulls managed to come back immediately, and the daily cycle might have ended in an extremely quick fashion with a low Friday morning in Asia.
In the best case, the bulls still have enough fuel to extend the recovery towards the 61.8% retracement at US$1,923 and especially towards the hard resistance around US$1,960. Such an advance would likely free some more momentum (especially in silver) and could even create an escalation until midsummer. An escalation would mean that gold would test the US$2,000 to US$2,025 range before any more significant pullback can unfold.
A more defensive perspective on the other hand would be, that a healthy but larger pullback has already started last Wednesday. Gold would likely come under some more selling pressure in this scenario. This could mean a continued sell-off down to the 200-day moving average (US$1,843) and the 38,2%-retracement at US$1,825 within June and July.
In both cases gold will test its 200-day moving average at some point.
In the “escalation” scenario it would take quite some more time and gold would first explode towards around US$2,000 before a larger pullback would then wipe out all the euphoria later in autumn again. Alternatively, we will get the pullback towards the upper edge of the former downtrend now and gold uses this little correction as a launch-pad for higher prices later in the summer.
Subsequently, an attack on the US$2,000 level is expected sooner or later this summer (July to September). Overall, the picture in the precious metals sector has certainly improved considerably thanks to the strong recovery over the last two months. As well, it needs to be noted that the real momentum is going to be in silver market, once the resistance at US$30 is has been overcome.
Commitments of Traders for Gold – Healthy Pullback or Escalation Until Midsummer?
Due to the gold price recovery over the last two months, the Commitment of Trades Report (CoT) has deteriorated again. The cumulative net short position stood at 248,175 contracts as of last Tuesday. In the long-term comparison, this setup however is rather high and continues to urge caution and patience. Hence, the CoT-report delivers a sell signal.
Sentiment for Gold – Healthy Pullback or Escalation Until Midsummer?
Sentiment numbers for gold are showing a rather neutral rating at the moment. So far, the recovery has not created any significant optimism let alone extreme euphoria. It is however extremely likely that the ongoing recovery will at least see some form of exaggerated optimism before it rolls over or pauses. Thus, sentiment does not stand in the way of a continuation of the rally.
Seasonality for Gold – Healthy Pullback or Escalation Until Midsummer?
Over the last 53-years a strong seasonal pattern has evolved for the gold market. Accordingly, gold would find its typical early summer low somewhere in June or July. Subsequently, a strong advance would follow in the next step pushing gold prices to a seasonal top around late September or early October.
In the current situation this could mean a continuation of the pullback that started last Wednesday over the next few weeks. From a projected low around US$1,820 to US$1,840 gold would then be ready to strongly rally during midsummer.
However, reducing gold´s historical movements to the last five years shows quite a different seasonal cycle! Hence, in the current bull market since 2016 gold tends to show strength up until mid to end of August before rolling over significantly in September. The weakness in June and July has not been evident over the last five years.
Given this statistical evidence gold has quite a high probability of simply continuing its rally towards US$1,960 and US$2,000 to US$2,025 over the next two to three months! Only after such a rally a large pullback would be likely.
Sound Money: Bitcoin/Gold-Ratio
With prices of approx. US$36,000 for one Bitcoin and US$1,890 for one troy ounce of gold, the Bitcoin/Gold-ratio is currently sitting at around 19. That means you now have to pay only 19 ounces of gold for one Bitcoin. Put the other way around, an ounce of gold currently only costs 0.052 Bitcoin. Thus, Bitcoin has lost around 45% against gold to where it traded in March and April.
You want to own Bitcoin and gold!
Generally, buying and selling Bitcoin against gold only makes sense to the extent that one balances the allocation in those two asset classes! At least 10% but better 25% of one’s total assets should be invested in precious metals physically, while in cryptos and especially in bitcoin one should hold at least between 1% and 5%. If you are very familiar with cryptocurrencies and bitcoin, you can certainly allocate much higher percentages to bitcoin on an individual basis. For the average investor, who is primarily invested in equities and real estate, 5% in the still highly speculative and highly volatile bitcoin is a good guideline!
Overall, you want to own gold as well as bitcoin, since opposites complement each other. In our dualistic world of Yin and Yang, body and mind, up and down, warm and cold, we are bound by the necessary attraction of opposites. In this sense you can view gold and bitcoin as such a pair of strength. With the physical component of gold and the pristine digital features of bitcoin you have a complementary unit of a true safe haven for the 21st century. You want to own both! – Florian Grummes
Macro update and Crack-up-Boom:
As in almost every other week, the Fed balance sheet has hit a fresh all-time high. Fed chairman Jerome Powell keeps the printing press rumbling despite rising inflation. The total assets expanded by 0.4% to a new record of US$7.94 trillion. The Fed’s balance sheet now equals 36% of the GDP for the U.S..
Naturellement, Madame Lagarde is pushing even harder and the ECB balance sheet is now on course to 80% of Eurozone’s GDP. This rise to the moon looks more and more parabolic as the total assets rose by another 14.5 billion EUR on QE. You can be sure that none of these irresponsible central bankers will have the guts to return to a more sustainable monetary policy.
One of the most obvious consequences is asset price inflation of course. While the worldwide economic has been rather muted the market cap of all stock markets combined hit a new all-time high driven by the overflowing liquidity provided by nearly all central banks on this planet.
But while further rising equity portfolios are certainly to be welcomed by most investors, the increased cost of living is becoming a serious problem for many people. This is true especially since the vast majority of people in any society is always struggling to meet ends needs. They simply don´t own anything that they could invest. Hence the rising tension within most western societies. Those who at least understand what’s going on are forced to become speculators and often use credit and margin to somehow profit from the asset price inflation. However, with credit and margin but without experience they only increase the imbalances in the system.
Overall, the crack-up-boom is up and running and accelerating. Like a dance on the volcano. And Central bankers are doing everything to outpace any deflationary forces by simply printing more and more. Yet, the worldwide race to the bottom has no exit but is a dead end.
Conclusion: Gold – Healthy Pullback or Escalation Until Midsummer?
Never before in the last 50 years it was more important to own some physical gold and silver. Independently of any price appreciation or any potential speculative gains. Simply as a protection against the loss of purchasing power and many other looming worst case scenarios.
As well from a technical point of view it is vital to now own a full physical position in precious metals. The 8-month pullback from the new all-time high is done and the bulls are back in the driving seat. Once gold sustainably takes out its all-time high at US$2,075 expect an acceleration and a rather quick rally towards approx. US$2,500 and probably higher. By then you will only run behind a train that has left the station. Physical supply is already tight, and premiums are often absurdly high.
Expect this recovery to run towards US$2,000
Technically speaking, gold is in a recovery since March 31st which still has room to continue towards US$1,960 and approx. US$2,025. Judging from the past, gold bulls should have enough strength to push prices towards those two numbers over the coming two to four months. Any pullback or breather on the way higher should be welcomed as one of the last chances to buy gold below US$2,000 and silver below US$30.
Hence, the “healthy pullback” scenario over the coming weeks might be perfect for anybody who still needs to get positioned. However, in a bull market surprises are usually happening to the upside. Therefore, a direct escalation until midsummer would leave many marveling at the wayside.
To conclude, buy any dip.