February 22, 2019
In last week’s article, “Gold - A Test of the 2016 High Next” , I stated the following:
Gold is going to new highs later this year, but we are very likely to get a sizeable pullback first.
I expect Gold to rise to the 1360s or 1370s, fail to break higher on the first attempt, with a sizeable pullback to follow. Support levels on the downside in Gold should we reach 1377 would be 1297, 1240, and 1220. There is also the 200-day moving average, currently at 1251. A healthy retracement in the MACD Line would provide the base to take us up to new highs.
We could get a higher high in Gold and a negatively divergent peak in the DSI below 80, or the DSI peaks in the 80s or 90s before we head lower.
With respect to the positioning of Funds, which have seen a massive swing from short to long since the lows of 1167…
The rate of change is extremely high, but that could be explained by the fact that we were coming off a record high net short position. Yet, it does support the view that if we do get up to the 1360s or 70s in price and that rate of change approaches the highest level in the past thirteen years, that Gold will fail to break resistance there and see a sizeable pullback to reset those numbers.
And my conclusion…
Based on what I am seeing today in the data, the balance of probabilities signal a move in Gold back up to the 1360s and 70s, once we hit bottom here shortly, with the risk of sizeable pullback to follow. Following that pullback, Gold is likely heading to new highs later this year, as the prospect of new stimulus policies from the Fed, global central banks, and governments around the world become increasingly likely and fiat currencies continue to be devalued en masse, especially the dollar.
Well, we have fallen short of 1377 so far and we’ve had a pullback to short-term support at 1325-1330, which was former resistance at 1331. The DSI peaked at 90 on Wednesday, when Gold peaked at 1350. It has fallen fifteen points in the past two days to 75.
Now we’re in no-man’s-land, as it were.
Gold could bounce straight back up to a negatively divergent higher high from both an RSI and DSI perspective, given the sharp move lower in both, to the 1360s or 1370s and then head down.
But the negative divergences on both the MACD Histogram and MACD Line are cause for concern in the short-term, especially as the MACD Line remains elevated.
Should we break 1325, then there is the prior low at 1305. Below there and we risk a move down to 1275-80, but let’s see if 1300-1305 holds first.
Personally, I would like to see a healthy pullback to 1280 or further, or at least go sideways for a while, to reset the MACD Line lower (and sentiment with it) to provide Gold with the energy it needs to take out key resistance at 1377. We have come a long way from 1167 and hit extreme overbought and overbullish levels. Sustainable breakouts do happen from such conditions, but it’s far easier from a more neutral position.
Funds have gone from short to long at an extremely fast pace, and as I said last week, a short-term reset would be ideal to provide the ammunition to move up to new highs.
Gold and the 10-Year Bond Yield have been extremely correlated on an inverse basis recently, and that was no different yesterday. Should yields continue to rise in the short term, Gold is likely heading lower.
The DXY is also heading higher, in my opinion. I’m still looking for a peak between 99-101.60. Should DXY continue to rally, that is likely to weigh on the yellow metal too.
Now, at the risk of boring everyone to death with this and attempting to raise the dead, some would say the most important correlation for Gold in dollar terms (XAU/USD) is to the USD/CNH, and more importantly recently, Gold in yuan terms, or XAU/CNY. Many still doubt its relevance. Look at the correlation between XAU/USD and XAU/CNY since they both bottomed on August 16 th:
And then there is simple math:
XAU/USD = XAU/CNY divided by USD/CNH
The reason why Gold in dollar terms and in yuan terms have been so correlated since that day in August is that the USD/CNH has been relatively stable. Fix one variable in the equation above and the other two are directly correlated.
The worst-case scenario for Gold in dollar terms is that XAU/CNY falls and the USD/CNH rises. Unfortunately, there is a risk of that in the short-term.
XAU/CNY hit a negatively divergent and extreme overbought peak on Wednesday at 9089 and has fallen back since. Like Gold in dollar terms, it could go either way from here, but 8700 is a key level that needs to hold in order to for Gold to maintain its uptrend.
At the same time, USD/CNH has been hitting lower lows recently, but they have been positively divergent at extreme oversold levels. Should the USD/CNH rally from here at the same time XAU/CNY falls, you do the math. It’s simple: Gold falls in dollar terms.
As redundant as this whole thesis may seem to some, please keep an eye on this. Ignoring it could be a painful mistake.
Although it is difficult to determine the next short-term moves in Gold, the bigger picture has not changed in the past 24 hours. Central banks are buying Gold at the highest rate since the 1970s. The Fed’s actual reversal to rate cuts and QE is inevitable, in my opinion, and even Yellen confirmed this week that this likely means a far weaker dollar, just as in 2009. This would also mean a far weaker USD/CNH. This has been and remains my primary scenario for a sustainable rally to new highs in Gold. The point is that Gold is still likely going a lot higher, and this is the pullback many of us were waiting for to BTFD.
Now is the time to be patient once more. To wait for Gold to find support on the downside, and get ready for the next leg up to new highs. Until then, the range is 1305-1350.
This may seem like a shameless plug but those who follow me know that I tell it like it is. I often get asked, especially recently, where to buy physical Gold and Silver coins and bullion. My preference is Sprott Money due to their excellent pricing, fantastic customer and delivery service, with competitive bullion storage facilities also. They only use the best depository companies for precious metals storage. Sprottmoney.com is also the best place to get news and expert analysis on Gold and Silver from multiple contributors, a plug, but a truthful one.