Nov 01, 2019
FUNDAMENTALS, i.e. the FED
The Fed cut rates again as expected Wednesday, but there was a slightly more hawkish tone with respect to further rate cuts. Powell ditched the “act as appropriate” language in favor of assessing the economic data and financial conditions at the next meeting, indicating that another rate cut in December is by no means a certainty. He also repeated the same mantra about how wonderful the economy is, but more importantly, said he saw signs of improvement both at home and internationally, citing Brexit and the U.S.-China trade negotiations.
With that said, and this is just my own opinion, the Fed and other central banks have already cracked open the floodgates of money-printing to provide liquidity to boost markets and/or cap yields. It is just a matter of time before the dam breaks, when the gap between asset inflation and economic growth is no longer tolerated. The 2020 elections are just around the corner now. Whatever happens in the short-term, the outlook for Gold, Silver, and the miners is extremely favorable.
Starting with the big picture and the weekly chart since the bull market began in 2015…
All of the moving averages are trending higher, with the 20-week > 50 > 100 > 200-week moving average. This is what we want to see in a bull market. The only concern here is that the gap between the averages has become somewhat wide and may signal further consolidation is necessary.
Although the RSI has fallen back to 63, I would prefer to see some further retracement to better set us up for the next rally. This is especially true when we’re coming off the highest weekly RSI reading since the extreme peak in August 2011. As it currently stands, there is a perfect set up for a negatively divergent higher high (higher Gold price but RSI lower than recent peak in August), which could signal a deeper pullback to follow.
Despite the slight improvement in price since the low of 1465 on October 1 (when the awful ISM data was released), the MACD Histogram continues to fall. This warrants attention also.
The MACD Line does not provide much comfort either. It continues to fall from its highest level since 2011 and has broken its signal line to the downside. Normally, I wouldn’t be surprised to see it go back up to retest the signal line, likely coinciding with a negatively divergent high in price, before falling hard.
That said, if the recent price action is just consolidation ahead of an even bigger rally to follow, then the MACD Line could go up and even exceed the 2011 peak. Whether it shoots straight back up through its signal line or kisses it and then dumps, how the MACD Line performs in the next few weeks will clearly indicate the direction in which Gold is headed for the next several months, imho.
From a price perspective, only a break of the wave 1 peak of 1350 in February and trendline resistance since the July 2016 peak (in green) at ~1340 would be cause for concern that a much more significant decline is under way.
On a shorter timeframe, the daily chart clearly shows the level of indecision in the market right now. Both the RSI and MACD Histogram are basically flat after watching price go sideways for the past several weeks.
On the negative side, the 20-day moving average broke the 50-day and both are trending lower now.But there are a couple of positive signals. Gold closed above its wedge pattern for the first time yesterday, and the MACD Line continues to trend higher after breaking its signal.
It should come as no surprise that the price action in Treasury Inflation-Protected Securities, or TIPS, matches that in Gold. They have been near perfectly correlated since the bottom in November 2018.
What is interesting is that TIPS had a fake break to the downside following the FOMC on Wednesday and tested the upper band of its wedge yesterday before falling back towards the end of the day. How this plays out one way or the other will heavily influence the near-term outlook for precious metals. Given that I am looking for a bottom from which another significant rally occurs, a break of the recent double top at ~116.30 in TIPS would signal falling real yields again and higher Gold and Silver prices.