Gold has held up surprisingly well in spite of a crude and equity rally. Funds are putting on bullish structures, and the ETF builds are continuing at a historic rate and are threatening one-year highs. The two biggest questions for yellow metal are:
- Does this "W" rally in equities and oil continue?
- Is this just like the last four years, albeit at a higher pace, where risk-off pervaded for several weeks before resuming normal course of business?
The anecdotal evidence says this time might be for real with headlines and markets all aflutter for gold, but we've seen this before. In an odd perversion, higher oil is interpreted currently as driving risk-on feel to markets and is generally bad for gold.
Bull Case
- There is little possibility of a rate hike unless the economic data changes drastically and nearly forces the FOMC's hand.
- Golden Cross (if you are into that sort of thing) — upsloping 50 DMA has crossed the 200 DMA during a move higher. September 2012 was last time with prices at $1,761. It was the end of a loooong rally L.
- ETF adding ounces at a frenzied pace. This big of a move is indicative of real fear from investors and likely does not subside quickly.
- I'm not sure what to make of Brexit concerns as weak EUR and GBP are not great rocket fuel for gold because of strong USD headwinds.
- Gold's outperformance during the last few days of risk-on likely from longer-term ETF buying, which should sustain for a bit longer.
- Long since broken the downtrend from Q1 2013.
Bear Case
- If equities and crude in particular continue to rally, gold may run out of luster for drawing new longs.
- Rally from Dec. 3 now 59 trading days old. Starting to get long in the tooth as gold tends to run in 40- to 60-day cycles.
- GDP and personal consumption in the morning could betray the disappointing trend.
- RSI remains near overbought levels at 68 on a 14-day basis.
- We failed our second test of the 1,250 level on a close.
Chart 1
You'd expect gold (white candle) to have turned lower during the recent strength in oil (yellow) and SPX (green). The negative correlation still holds up well on an intraday basis, but over the last few days, the magnitude just hasn't been what you might otherwise expect. The Occam interpretation: Retail doesn't trust this equity rally at all. RSI along the bottom maintaining near overheated status.
Chart 2
GLD going through sharpest rally since it was a new thing. The meteoric rise of GLD holdings 2004-2010 was largely because of the newness of it, so for it to be back in vogue to this extent this quickly is telling of the underlying retail (or perhaps Institutional) psychology. This is by far the sharpest rally in holdings since 2010.
Coin Toss
The last four years have drilled into me some Pavlovian response that every rally has to run out of steam and ultimately end below where it started. I am beginning to think it's no longer the case.
A retreat toward $1,200 is entirely possible and grows more likely each day we don't break $1,250, but the last few days have served as a miniconsolidation, and we may yet see another spike before the next down move.
As has been the case, we are generally bullish given the long-term tailwinds. Silver just can't seem to get a bid, but it hasn't stopped gold yet. Higher.
