One More Higher High In Gold, Then Down We Go - David Brady (26/07/2019)

July 26, 2019

Once again we are approaching another FOMC meeting, upon which we will learn whether Gold has already peaked or has one more higher high before doing so. Either way, it is only a matter of time before we get a significant reversal. Until then, unless 1385 is broken, I am only looking up for now.

We have enjoyed a $287 rally from 1167, a rise of 25% since August, and a $187 rally from 1267, a rise of 15% since May 2, to a high of 1454. These numbers will be even bigger if we have not seen the peak yet, but by then, a sizeable reversal will be overdue. We may have to wait until after the FOMC and a spike higher before such a reversal occurs.

The data is piling up against Gold here, just as it did in the opposite direction at the low last August, but it can become more extreme before it matters.

TECHNICALS

Daily

There is a bearish ending diagonal or flag playing out on the daily chart, allowing for one more higher high. A break of that flag to the downside will be first sign that a bigger drop is coming.

The RSI and MACDs are set-up for another negatively divergent higher high, assuming the high is not already in place.

Should Gold rise further, the RSI will become extreme overbought again while also being negatively divergent.

Lower lows occur below 1400 (bottom of E in ABCDE of wave 4) and 1385 in particular, confirming the beginning of the drop.

Seeing the 20D EMA break the 50D MA would also be a confirmation, but a delayed one.

Weekly

The RSI was beyond extreme overbought at its peak of 77 recently, its highest level since the August 2011 high. Each time the RSI was 70 or above in 2010-11, whether followed by a negative divergence or not, it soon led to a fall of over $100 next.

The weekly RSI was also negatively divergent at 1454 and is still extreme overbought at 74.

The MACD Histogram is coming off its highest level since April 2016, and the MACD Line from its highest since August 2016.

A weekly close below 1400 would likely signal the peak is in. The MACD Histogram crossing zero to the downside also.

FIBONACCI LEVELS - 1485 is the 50% Fib of the entire drop from 1923 to 1045. I expect this to be strong resistance, just like the 38.2% resistance was at 1377, and certainly not broken the first time around.

ELLIOTT WAVES

As with all Elliott wave analysis, there are several possible counts, but the common theme in all of these scenarios is that we’re going to get a sizeable pullback one way or the other soon. Possibly to ~1350, 1270, 1170, or even sub-1000, but the latter is a very low probability event, and only if 1167 is broken.

SENTIMENT is extremely bullish up here. There are very few bears left, which increases the likelihood of a major turn downward. I am a long-term bull, by the way, but I go where the data leads me in the short-term, and the signals are pointing south.

POSITIONING

Commercials hit their highest net short position since September 2016 recently. The Banks, since October 2016. One final spike higher in Gold could see them hit new record high short positions before the drop occurs. This would be a mirror image of their record long levels back in August 2018, and we all know what happened next.

Funds have increased their net long position by 228k contracts since April, a massive move, and now are close to 200k net long.More than sufficient for a peak to already be in place , but even more so if we do get one more pop before we drop.

INTER-MARKET ANALYSIS

USDCNH & XAUCNY

USDCNH remains stuck around 6.88. Could it be the calm before the storm? Could we see a spike higher on an escalation in the trade war? This would weigh on Gold in dollar terms.

XAUCNY tagged 10000 and retreated, as forecast, and is now hitting lower lows.

The daily RSI has reset to 54, so plenty of room for this to spike higher to a negatively divergent higher high and then dump.

The weekly RSI is coming off an extreme peak of 80 and is now down to 75. This is sufficient for a spike higher to establish that negative divergence before it dumps. Alternatively, the peak is already in.

TIPS / REAL RATES

Real Yields may have bottomed out, based on the 5-Year in particular.

Momentum higher is clearly failing in TIPS, but there is room for one more spike higher here too. (TIPS are basically the inverse of real yields).

A break of 114 would signal trouble.

The weekly chart is even more concerning.

The RSI and MACD Histogram are both negatively divergent here, and the RSI remains extreme overbought.

Perhaps even more importantly, the MACD Line is rolling over from extreme levels.

The ending diagonal is precarious, to say the least, as is the steepness of the rally. This is vulnerable to a violent break to the downside, which would likely weigh on Gold also.

FUNDAMENTALS

Once again, all eyes are on the Fed. The FOMC decision next week is pivotal.

Beyond the short-term, the return to ZIRP, possibly NIRP, QE, and ultimately MMT means Gold and Silver are going multiples higher once the dollar peaks and falls.

In the meantime, an escalation in the trade war could send USD/CNH through 7, coupled with a peak and drop in XAU/CNY at or above 10000 yuan, which would send Gold tumbling lower.

A stock market crash would be deflationary in the short term, and we could see a repeat of April-October 2008 sell-off in Gold ahead of the return to QE.

CONCLUSION

Technicals, Sentiment, Positioning, Elliott Waves, USDCNH & XAUCNY, and real yields all signal a peak in Gold is imminent, if it has not already occurred, but we may get one more spike higher before that happens. Wait for a break of support at 1400 or, more conservatively, 1385 for confirmation.

That said, unless 1167 is broken (and that’s a long way away) we’re still in a bull market, and the dips should be bought. At the same time, remain patient in doing so. No one wants to catch a falling knife.

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