by: Ben Lockhart
May 18, 2015 3:49 AM ET
Summary
- After testing our patience, we now have signs of life in the gold market, and our summer rally may now be underway.
- Demand for physical gold has risen in the wealthiest Eurozone country, and could be a sign of things to come if the global bond market starts to empty out.
- We may see a small pullback towards $1200 at the start of the week, but are likely to rally higher in the very near term.
The recent gold (NYSEARCA:GLD) market is no different. The run from $1140 to $1225 seems like a lifetime ago, and the subsequent consolidation phase certainly tested everybody's patience, but just at the point where the bulls started to question their thesis, gold began to rally hard.
We had the 'fakeout' rally up to $1215 on April 24th, then the 'shakeout' decline to $1170 on April 28th, but from the start of May gold has begun to look a little more promising, and has continued its ascent with a close at $1224 on Friday, gaining 4.6% in the last two weeks.
So is this it? Are we on our way to a 13 handle in the gold price? Or does our cabbie have a bad attitude and a flat tire? Let's analyze some of the factors that may have a bearing on the gold price moving forward - this week we start with the Eurozone.
Germans Bullish on Gold - a Sign of Things to Come Globally?
One of the regular commenters on my last article posted a link to a piece written by CNN Money regarding a 20% increase in demand for gold bars and coins in Germany in the first quarter of this year. It was a good spot on his part, and the article content deserves consideration.
Thinking about the current situation in Europe, you can appreciate the effect of growing concerns about the stability of the Eurozone as a whole - gold in Euros is on a tear:
(click to enlarge)
*courtesy of Stockcharts.com
As we can see from the above chart, gold in Euros has handily outperformed gold in Dollars for over a year, and while this is mostly due to the epic fail in the strength of the Euro, the statistics confirm that buying demand within Europe is now on the rise.
The Eurozone, but Germany in particular, is under pressure from a triple threat. Their currency has weakened tremendously over the last year; their stock market has entered a blow-off top type phase (history shows these don't end well); and their bond market has recently come under pressure, with the long Bund declining 15% in just a couple of weeks since Bill Gross made his ominous call for a bull market top.
Germans are quite rightly looking around and realizing that they need to move their capital into any asset that will hold its value, and with gold seemingly in the last stage of its bear market and the Euro projected to fall a lot further, it is an asset that fits the bill very well.
In a previous article I talked about what we would need to re-ignite the bull market in gold, and one of the factors mentioned (the biggest factor in my opinion) was a bond market top. Bullion costs money to store and insure but pays no interest or dividends; bonds cost very little to hold, pay interest, and until recently, were deemed the best safe haven store for capital.
At present the shorter duration bonds of the more stable global economies are still attracting buyers, but for die-hard bugs looking for a potential end to the bear market in gold this is encouraging. When global treasuries no longer reign supreme, we can expect to see interest rates rise naturally and asset inflation generally begin to take hold.
In the shorter term, we may see one final decline in the gold price as rising yields initially disincline investors to hold non-interest bearing assets. However, should we see real panic selling in the bond market, the global economic instability will likely overpower the negative sentiment, and investors looking to safeguard their wealth from capital risk should spur major buying demand in precious metals.
Are Equities About to Correct (finally)?
You are probably sick of hearing me say that the equity markets are close to a correction. I wrote a piece on March 24th stating that I thought we should be heading lower in the US broad market, but so far we have failed to decline more than 4% and we then recovered those losses quickly. In that article I gave my maximum upside target as 2175-2185 for the S&P500 (NYSEARCA:SPY), and we have since gone nowhere - both failing to breakout and failing to breakdown.
My views have not changed and I still see the greater risk to be to the downside. We are seeing some complacency in the volatility index (NYSEARCA:VIXY); and despite a global bond market rout, equities did not kick on higher; so if we were to see some kind of oversold dead cat bounce in longer duration treasuries (NYSEARCA:TLT), the chances are the broad market would at best tread water.
In my opinion, the rising yields we are seeing in the bond markets are indicative of a market pricing in a rate hike by the Federal Reserve coming sooner rather than later. Their vague and indecisive rhetoric has not inspired confidence in the markets, and has led to the choppy range-bound action we have seen thus far, and the market needs confirmation either way in order to take its next step with surer footing.
Despite vague official policy statements, the comments coming from board members between meetings shows a growing urgency for action among the majority; and I expect at least an announcement of when they will act in the coming June press conference - if interest rates are rising naturally it would not do for the Fed to remain so far behind the curve.
Should we get this long-awaited US equity market correction, or should the market simply believe it is coming soon, gold will catch an anticipatory bid, but watch out for the rate announcement on June 17th as a hike will have a negative effect on all securities, gold prices included.
For many assets we could well see a rally into the meeting and a sell-off thereafter.
Data Points
GOFO
Backwardation (a lack of physical gold for sale to satisfy current demand) remains in place and is increasing. This shows a persistent level of buying demand for bullion and is consistent with the increase in sales of coins and bars we are seeing in Germany.
We have a cushion under the gold price and I would estimate it is unlikely to break down lower than $1198 in the next week, and is certainly a potential reason for a further short-term rise in the price. It bodes very well for our short-term rally prospects.
COT
The latest figures from the Commitment of Traders report are below:
| COMMERCIAL | LARGE SPEC | SMALL SPEC | |||
| LONG | SHORT | LONG | SHORT | LONG | SHORT |
| 144,829 | 222,331 | 179,257 | 101,817 | 32,075 | 32,013 |
| CHANGE | CHANGE | CHANGE | CHANGE | CHANGE | CHANGE |
| +6,733 | +10,073 | +6,152 | +1,152 | -638 | +1,022 |
The figures for the last two weeks show that the commercial traders added close to 20,000 long contracts, and reduced the number of short contracts by roughly 10,000. Looking at the data as a whole, it is quite unusual to see both the large speculator category and the commercials add to their long positions in equal amounts.
This is encouraging for gold bulls in the short term and is another positive to add to the GOFO data and the increase in demand of bars and coins we have seen in the first quarter of 2015. All in all this is price positive.
US Dollar
We are seeing a growing number of calls that the dollar rally is over with, but my own opinion is that this is far from true. Regular readers of my articles will know that we are now approaching my price target for the low on the DXY chart (NYSEARCA:UUP), and I expect us to bottom in or around this region and start to move higher.
I've talked about the fundamental reason for the dollar rally many times in previous articles, so I won't labour the point this time around, but I will remind you that a rate hike is dollar bullish and we have an important meeting in mid-June on the horizon. Could this be the catalyst for the low to form and the rally to resume?
The chart I included last week is still very much applicable here and the price targets given remain unchanged. We can certainly head a touch lower in the short term, and dollar bulls are likely to have their patience tested, but I have already started to sell my short hedges and add to my long holdings in stages.
Additionally, although they may well head a little higher short term, both the Euro and the Pound look relatively close to tops and I believe both will eventually make new lows, so those looking to play the currency markets may like to review their respective charts.
Gold Miners
When gold was falling the miners held their gains. This week the majors (NYSEARCA:GDX) and the juniors (NYSEARCA:GDXJ) both underperformed the percentage rise in the gold price, but I consider this to be a facet of relative price performance finding equilibrium rather than a cause for concern.
I have included a daily chart for the gold mining majors below:
(click to enlarge)
The 21.50-22 level is key resistance at this time. A move through this zone followed by a consolidation that holds above it would be bullish and would likely lead to a move up to the top of the declining trend channels at roughly 25.
Gold Chart
A look at the daily chart shows that we have made good progress in our bullish counts:
(click to enlarge)
At this point in time, there are two counts on the table:
- The red count says we make a top somewhere around the $1250 price level, and head to new lows. This corresponds with the 21.50 price level for GDX. Bulls need to be on the lookout for reversal signs as we approach that resistance zone.
- The white count says we break through that first resistance zone and head for a test of the January highs, and possibly head much higher towards $1385. This would correspond with our 25 price level for GDX.
In the very short term I am ideally looking for a small wave lower towards $1203/9 before the rally recommences, and I would expect to see a sharp leg higher following that low.
However, this small move down does not strictly have to take place, and given I am already long from lower I personally hope it blasts higher right out of the gate. My point is you should not get shaken out if we do decline in the early part of the week.
As usual I will update charts/thoughts in the comments section, and I wish you all good luck for the coming week!
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