Long Term Technical Backdrop Constructive

After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold.

From a technical perspective, there are indications that the low at $1045.40, incidentally printed just ahead of the first Fed hike in December 2015, was significant and now provides medium-term support as indicated by the price channel in the chart below.

 

Gold, long term – long term lateral support was tested in late 2015 in conjunction with a positive RSI divergence – click to enlarge.

 

The zone provided significant resistance in 2008 and throughout much of 2009, and following the upside breakout provided solid support on the pullback in early 2010. It also corresponds to the 50% retracement of the uptrend from the July 1999 low at $253.2 to the high at $1923.7 in September 2011.

Yet another reason why the low appears significant is the presence of a bullish RSI divergence, as depicted by the blue lines: RSI divergences are a very useful signal for technical analysts and contrarian investors, as they often indicate trend reversals.

Another positive development in terms of price action is the bullish crossover signal of the 50- and 200-week simple moving averages, for the first time since 2002. This signal, however, is only a prerequisite for a new uptrend, and resistance levels at $1275/$1280 and especially $1377.5 must be breached to confirm an upside breakout from the current range.

In the shorter-term, $1211 provides support, followed by $1177 and $1154. A break below the $1124.3 low would confirm a bigger correction to $1045.40, which as  mentioned above currently represents medium-term support.

 

Rate Hike Not Necessarily Bad News for Gold

In terms of the Fed, as the probability of a March hike rose to nearly 80% as of last Friday’s close, some downward price pressure in the run-up to decision on March 15 was certainly not inconceivable and should be expected.

As illustrated by dovish FOMC member Brainard’s recent speech, along with several speeches and comments by other members in the week before last (Kaplan, Harker, Williams, Lacker, Dudley, Mester, Powell, and Janet Yellen herself), jawboning has been hawkish lately, which has weighed on gold prices ahead of the decision, leading to a test of technical support levels.

A potential hike by the Fed this month need not necessarily deter the resumption of the uptrend: since April 1968, for any given month in which the effective federal funds rate rose, gold rallied more than 50% of the time. Although the next hike may potentially indicate a quickening in the pace of tightening, the cycle as such need not necessarily spell carnage for gold prices.

For instance, during the tightening cycle between June 2004 and June 2006, when Fed fund rates rose from 1% to 5.25%, gold prices rallied some 50%. Following the first hike of the current cycle on December 16th  2015, prices rose from $1071.5 to $1234.5 by the end of following quarter (Q1 2016), for a gain of more than 15%. Gold also rallied following the second Fed hike on December 14th  2017, when the metal closed at $1144.6, rising to nearly $1260 at its recent interim peak.

 

An Unusual Cycle

Coming off a zero-lower bound regime, this is an abnormal monetary tightening cycle. Money supply is at record highs after three rounds of QE, yields broadly remain close to their record lows and given potential trade wars and significant fiscal stimulus, the US dollar may well remain subdued under the Trump administration. Combining these three variables (M2, 10-year US Treasury yields, and the Fed’s broad US dollar index) yields an interesting metric with which to compare gold prices over the long-term.

The negative relationship between gold and 10-yr nominal Treasury yields over the past 20 years is particularly interesting, as is the correlation between real yields and gold over the last 10 years. Currently, 10-yr real yields suggest gold prices may be slightly undervalued.

 

Gold price vs. nominal 10 yr. treasury note yields and 10 year TIPS yields (yields inverted) – click to enlarge.

 

Contemplating a longer period and using a metric combining M2, 10-yr nominal yields and the broad USD index as independent variables going back to January 1973, a statistically significant multiple regression currently implies gold prices of around $1600.

 

Gold price vs. implied gold price yielded by multiple regression combining M2, 10 yr. UST and US dollar index since 1973 – click to enlarge.

 

Conclusion

Perhaps most importantly, there are no signs of a trend reversal in this indicator yet, which suggests the environment for gold remains positive. In other words, short term selling pressure ahead of the Fed may actually provide an interesting entry opportunity for investors considering to buy gold for the long term.

 

Charts by stockcharts, FRED/ Helder Mello Guimaraes

 

Chart captions & editing by PT

 

This article was originally published at Goldbroker.com

 

Helder Mello Guimaraes is a Brazilian born independent investment consultant. A graduate of the ICMA Centre in Reading (UK), he has worked in financial markets in various capacities since 2001: as a technical analyst, portfolio manager, trading system developer and consultant. He frequently combines fundamental, technical, and statistical analyses to identify opportunities and formulate investment strategies in the main asset classes.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Too Much Bubble-Love, Likely to Bring Regret
      Unprecedented Extremes in Overbought Readings Readers may recall our recent articles on the blow-off move in the stock market, entitled Punch-Drunk Investors and Extinct Bears (see Part 1 & Part 2 for the details). Bears remained firmly extinct as of last week – in fact, some of the sentiment indicators we are keeping tabs on have become even more stretched, as incredible as that may sound. For instance, assets in bullish Rydex funds exceeded bear assets by a factor of more than 37...
  • How to Buy Low When Everyone Else is Buying High
      When to Sell? The common thread running through the collective minds of present U.S. stock market investors goes something like this: A great crash is coming.  But first there will be an epic run-up climaxing with a massive parabolic blow off top.  Hence, to capitalize on the final blow off, investors must let their stock market holdings ride until the precise moment the market peaks – and not a moment more.  That’s when investors should sell their stocks and go to...
  • What Kind of Stock Market Purge Is This?
      Actions and Reactions Down markets, like up markets, are both dazzling and delightful. The shock and awe of near back-to-back 1,000 point Dow Jones Industrial Average (DJIA) free-falls is indeed spectacular. There are many reasons to revel in it.  Today we shall share a few. To begin, losing money in a multi-day stock market dump is no fun at all.  We'd rather get our teeth drilled by a dentist.  Still, a rapid selloff has many positive qualities.   Memorable moments from...
  • Monetary Metals Brief 2018
      Short and Long Term Forecasts Predicting the likely path of the prices of the metals in the near term is easy. Just look at the fundamentals. We have invested many man-years in developing the theory, model, and software to calculate it. Every week we publish charts and our calculated fundamental prices.   A selection of 1 and ½ ounce gold bars – definitely more fondle-friendly than bitcoin, but a bit more cumbersome to send around. [PT]   However, predicting the...
  • The Donald Saves the Dollar
      Something for Nothing The world is full of bad ideas.  Just look around.  One can hardly blink without a multitude of bad ideas coming into view.  What’s more, the worse an idea is, the more popular it becomes. Take Mickey’s Fine Malt Liquor.  It’s nearly as destructive as prescription pain killers.  Yet people chug it down with reckless abandon.   Looking at the expression of this Mickey's Malt Liquor tester one might initially get the impression that he is...
  • US Stocks - Minor Dip With Potential, Much Consternation
      It's Just a Flesh Wound – But a Sad Day for Vol Sellers On January 31 we wrote about the unprecedented levels - for a stock market index that is - the weekly and monthly RSI of the DJIA had reached (see: “Too Much Bubble Love, Likely to Bring Regret” for the astonishing details – provided you still have some capacity for stock market-related astonishment). We will take the opportunity to toot our horn by reminding readers that we highlighted VIX calls of all things as a worthwhile...
  • Why I Own Gold and Gold Mining Companies – An Interview With Jayant Bandari
      Opportunities in the Junior Mining Sector Maurice Jackson of Proven and Probable has recently interviewed Jayant Bandari, the publisher of Capitalism and Morality and a frequent contributor to this site. The topics discussed include currencies, bitcoin, gold and above all junior gold stocks (i.e., small producers and explorers). Jayant shares some of his best ideas in the segment, including arbitrage opportunities currently offered by pending takeovers – which is an area that generally...
  • “Strong Dollar”, “Weak Dollar” - What About a Gold-Backed Dollar?
      Contradictory Palaver The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronouncements and reversals which will take place in the coming months and years as the world’s reserve currency continues to be compromised.  So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.   A modern-day...
  • Seasonality of Individual Stocks – an Update
      Well Known Seasonal Trends Readers are very likely aware of the “Halloween effect” or the Santa Claus rally. The former term refers to the fact that stocks on average tend to perform significantly worse in the summer months than in the winter months, the latter term describes the typically very strong advance in stocks just before the turn of the year. Both phenomena apply to the broad stock market, this is to say, to benchmark indexes such as the S&P 500 or the...
  • The FOMC Meeting Strategy: Why It May Be Particularly Promising Right Now
      FOMC Strategy Revisited As readers know, investment and trading decisions can be optimized with the help of statistics. One way of doing so is offered by the FOMC meeting strategy.   The rate hikes are actually leading somewhere – after the Wile E. Coyote moment, the FOMC meeting strategy is especially useful [PT]   A study published by the Federal Reserve Bank of New York in 2011 examined the effect of FOMC meetings on stock prices.  The study concluded that these...
  • The Future of Copper – Incrementum Advisory Board Meeting Q1 2018
      Copper vs. Oil The Q1 2018 meeting of the Incrementum Fund's Advisory Board took place on January 24, about one week before the recent market turmoil began. In a way it is funny that this group of contrarians who are well known for their skeptical stance on the risk asset bubble, didn't really discuss the stock market much on this occasion. Of course there was little to add to what was already talked about extensively at previous meetings. Moreover, the main focus was on the topic...
  • When Budget Deficits Will Really Go Vertical
      Mnuchin Gets It United States Secretary of Treasury Steven Mnuchin has a sweet gig.  He writes rubber checks to pay the nation’s bills.  Yet, somehow, the rubber checks don’t bounce.  Instead, like magic, they clear. How this all works, considering the nation’s technically insolvent, we don’t quite understand.  But Mnuchin gets it.  He knows exactly how full faith and credit works – and he knows plenty more.   Master of the Mint and economy wizard Steven Mnuchin and...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com