Thursday was a momentous day for the precious metals sector with gold, GDX and other índices, and giant gold ETF, GLD all breaking out on impressive volume, and this development was all the more extraordinary because it happened when the broad stock market was crashing. This is viewed as a strong sign that instead of being dragged lower still by a crashing stock market, the precious metals sector will soar. Silver hasn’t broken out yet, but it should soon follow suit.
In recent weeks we have been wary that, despite highly favorable COTs and Hedgers charts and rotten sentiment indicators, etc,. a general asset liquidation might drag the precious metals sector even further down, but Thursday’s extraordinarily positive action by the sector serves to allay those fears. Of course, it’s not hard to see why the precious metals sector might do the opposite to what it did back in 2008 when the market crashed, and it nosedived too. There are two very big differences this time. One is that, before the 2008 crash, the precious metals sector was actually quite elevated. That is in marked contrast to now where it is beaten into the ground with sentiment in the basement – basically it is so unloved and neglected that the only way is up. The other big difference between now and 2008 is that while a major asset liquidation cycle will result in a flight to cash that could drive the dollar significantly higher, beyond that the longer-term outlook for the dollar is grim, with much of the rest of the world, tired of U.S. bullying in the form of sanctions, military threats, and now trade wars, and its unquestioning support of rogue states like Saudi Arabia and Israel, committed to freeing themselves from dollar hegemony – and plans in this direction are now well advanced, with countries like China and Russia having built up big gold reserves that can at some point be used to back their currencies, and workable substitutes for the SWIFT payments system at the trial run phase. Subjected to continuous provocation, China may at some point decide to go for the “nuclear option” and dump its huge Treasury hoard, sending the Treasury market reeling and interest rates skyrocketing, which will cause the US economy to buckle and implode – the U.S. appears to be overlooking that China has this power.
Let’s now review the charts to assess the significance of Thursday’s breakout. We start with gold where we see on its 6-month chart that it staged an impressive high-volume breakout from a rectangular trading range that formed following the low in mid-August. Right up until the breakout the pattern was ambiguous with the price being pressured by the falling 50-day moving average, so that it could easily have broken down again. Thus this big up day, with the price breaking clear above not just this average but also the resistance at the top of the pattern, was certainly an event of significance. The minor reaction on Friday is normal and provided us with an opportunity to pounce on the sector, having grasped the magnitude of Thursday’s action.
Chart courtesy of sentimentrader.com
How does what is going on on gold’s chart fit into the larger picture? To get a handle on that we will now take an updated look at gold’s 10-year chart. You may recall that when gold crept up to the resistance at the top of the presumed giant base pattern earlier this year, we did not expect it to drop back again, or at least, not by as much as it did, but having dropped back more than we expected – and lambasted precious metal stocks in the process – it has arrived back in the broad zone of quite strong support shown. Now what appears to be going on is that it has just marked out another “shoulder” low of a complex Head-and-Shoulders bottom with multiple shoulders. Certainly, the now powerfully bullish COTs and Hedgers charts strongly suggest that it isn’t going any lower, and it was heartening to see that it was not perturbed at all by the broad market cratering last week – on the contrary, it loved it! This is the strongest indication we could hope to see that this time, gold and the precious metal sector are going to go contra-cyclical and rally when the broad stock market drops, or during a general asset liquidation.
The SPDR Gold Trust ETF (GLD) rose $0.28 (+0.24%) in premarket trading Wednesday. Year-to-date, GLD has declined -6.35%, versus a 5.49% rise in the benchmark S&P 500 index during the same period.
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