Gold: Bullish arguments outnumber the concerns
Bijgewerkt: 30 dec 2020
Please read the Disclaimer before reading this article.
Things are getting very interesting in the gold market. Let’s start with a quick review of what I wrote two weeks ago: “We saw very constructive price action these last two weeks in the way where gold bounced and in the way the RSI behaved.
In my opinion, there is a 50% chance we have seen the low, 40% chance we go lower again (below 1760) but should see a strong close of the month (this is vital), and a 10% chance that something more bad happens (since I don't have a clear view on the short-term fundamentals, this option needs to remain open)”
As discussed back then, the behaviour in the RSI was just textbook perfect.
I finished that article by asking what would follow after this very bullish RSI pattern that I was seeing: “If you look at the other times when gold bottomed with an RSI of 30, in some instances that was the bottom, in other instances, we saw a rally and thereafter a slightly lower low on a positive divergence. We'll have to wait and see.”
Now, two weeks later, we know what path gold has chosen.
On December 10th (gold was at 1840 usd), I shared the following chart on twitter and commented: “Looking at the behaviour of the RSI during this bounce, it shows that it's much stronger than we would historically expect when a lower low was coming...”
(Every vertical line shows when gold bottomed at an RSI level of 30. As I showed in my previous article, the RSI doesn’t get oversold in a bull market. It was thus crucial that it did not get oversold during this correction. The question remained if we would see a retest of the low, a slightly lower low, or if we had seen the low. What was clear in any case was that the RSI could not get below 30 in any of these instances.)
As I have explained in previous articles, I don’t like it when gold makes a big move on headlines and I’m always cautious of gold moves around a fed meeting. This last week, we had a fed meeting and gold price action was volatile, as we could expect. We saw a good close and I wrote the following on twitter (December 16): “Back above resistance. Last confirmation we need is a strong weekly close and buy signal on GDX.”
In this article, I’ll analyse these two things that I was still looking for.
The reason I wanted to see a strong weekly close was that after a fed meeting, we often see false moves. We saw one on Wednesday when gold declined during the fed meeting but ended the day flat.
A strong weekly close would give me the confidence that the reversal off the lows on Wednesday was not a fake move.
We closed the week 30 dollars higher than on Wednesday so I think the risk of a fake move is gone.
Buy signal GDX
Now it gets interesting. Since the top in early August in the gold mining shares, we saw several oversold signals (indicating the weakness of the market) and never saw a bottoming formation followed by a buy signal.
This changed this week. We have now gotten the first buy signal in GDX since the peak in early August. The RSI getting overbought indicates the strength of the market.
As you can see, we got a very weak buy signal after the election but I warned of that one probably being a fake one because it was based on a news event.
The next chart shows that after the buy signal in June, we saw a small dip that retested the former rally high. We saw exactly the same thing happening on Friday. (GDX can go a bit lower as shown on the chart.)
In my opinion, things are looking very good for the precious metals. Another thing I really like is the doubt I’m seeing with a lot of gold analysts. I remember the rallies we saw in September and October that got a lot of analysts excited. With this rally, sentiment is completely different than in the past. This is the kind of sentiment we need for this to be the real breakout.
The following chart shows the short term price levels of interest. 1855 is a must hold level and the next resistance is around 1918.
You can see how the 1918 level held as support in August and early September. Once the level failed, we saw a sharp decline. In October and November, we had a few false breakouts above the 1918 level. I’ll explain what is different this time.
When the first fake ‘beakout’ happened in early October, I wrote the following: “Because we haven’t seen a clear bottoming formation in gold or the miners, I think it is possible we go lower again.
I completely agree with all the gold analysts I follow that the next move in the gold market will be a very big one.
However, from a contrarian point of view, wouldn’t it be beautiful that the analysts that stayed correctly bearish over the last few weeks and now turned bullish, would give the topping signal?”
This is exactly what happened, the ‘breakout’ quickly failed. One of the reasons was the extreme bullish sentiment around that time. As I already explained, this is now completely different.
All those false breakouts also happened before we had tested the +-1800 level that I was expecting since early August. We have now seen that final move lower.
Another reason why all those breakouts failed was that we hadn’t seen a clear bottoming formation in gold. This made me suspicious. Now, we have seen a perfect bottoming pattern (RSI bottomed at exactly 30) at a perfect price level.
This breakout is also accompanied by a buy signal in the GDX. All the false breakouts before didn’t have this.
If you ask me, putting all the evidence together, I’m not looking for lower lows or a retest.
If you take a look at the diagonal resistance lines for gold, you could argue that gold hasn’t broken out yet. I personally don’t give much attention to these diagonal resistance lines. I let the following chart speak for itself. I prefer to use horizontal support and resistance levels.
As you saw on the chart above, these (horizontal) resistance lines are not perfect either, we saw a lot of false breakouts. (If they always worked perfect, investing would be rather easy.) But, if you combine them with the things I do (sentiment, bottoming formation, RSI pattern, and GDX buy signal), I would suggest that it worked pretty well these last few months.
I explained all the positive elements I’m seeing in the gold market so I won’t repeat them here.
What are the things I don’t like?
Short-term fundamentals are still not clear to me. US bond yields look like they want to break higher, which would probably not be that good for gold. But, as I’ve shown before, there are periods when gold just does what it needs to do regardless of the fundamentals.
Another thing I don’t like is that big mining shares like Barrick Gold Corp are lagging. Barrick was the first to break out above resistance earlier this year and previous times when Barrick remained behind were times to be cautious.
However, the bullish arguments clearly outnumber my concerns, I really like how gold is behaving.
As I’ve explained before, I always have a plan for every situation that can unfold. Nobody is right all the time and with investing, this isn’t necessary either. What is necessary however is that you have a plan.
As legendary investor George Soros put it: “It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.”
I hope I’m right so that I’ll make a lot of money in the coming months. But as I’ve shown in previous articles, I have a strict trade management that will prevent me from losing money in this investment (since I already have a profit since I went all-in). That’s the key to trading/investing. And it is probably also the most difficult thing to learn.
Thank you very much for reading my article.
You can follow me on twitter: @adaptiveinvest