- The recent move higher in gold has flipped the quarterly chart back to bullish.
- The Fed’s pivot is likely a tailwind for gold, and thus far price action in gold is responding well to this news.
- As long as the $1,325/oz level is defended on a weekly close, the bulls remain in control of the bigger picture.
While Q3 2018 seems like an eternity ago, it was a troublesome landscape for the metals and miners, with a hint that we might have the first real hawk at the Fed in a very long time. Powell seemed content to continue to raise into a potential recessionary landscape and didn’t seem pressured at all to bend with the market’s back beginning to break as we started Q4. The initial 10% drop in the S&P-500 wasn’t enough to waver his hawkish stance, but apparently a 20% drop is where he draws the line. It was just before Christmas that market participants got a look at what Powell was really made of, and he turned out like many other Fed chairs, to be a dove in hawk’s clothing. This revelation allowed gold to find immediate support, finishing the fourth quarter at a price of $1,280/oz, well off its Q4 lows of $1,180/oz. Since that time, the gold trade has been emboldened even further with Powell completely flipping his stance on planned monetary actions. The potential three hikes in 2019 is now looking like one to two cuts, and another cut could easily come on the table in 2020. This massive shift has helped to put a firm bid in the gold price, and fortunately for investors, this time it looks like it might be for real.
To sift through the daily and weekly noise, I prefer to use monthly and quarterly charts for asset class positioning. As we can see in the quarterly chart of gold I’ve marked up below, the surge we’ve seen in Q2 certainly has some oomph behind it. Not only did gold manage to solidify itself back above its 10-quarter moving average (green line), it’s also managed to blast through the top of a five-year box it’s been building since late 2013. New highs in an asset class after a period of consolidation like this are often a very bullish sign, especially when there’s a material change in the fundamentals that support the move. In the case of gold, the Powell pivot is clearly the driver behind this move as cuts to gold are like spinach for Popeye.
The quarterly chart shown above shows that gold has pushed through a very key pivot on the quarterly chart at $1,365/oz and has thus far shown follow-through above this key level. Just as the massive 10-year base in the early ’90’s through early ’00’s had strong bullish implications for gold when the ceiling was finally broken, this new breakout may end up painting a similar picture.
If gold can hold above $1,325/oz on a monthly closing basis (closing price for the last day of month), I believe any 5% or larger pullbacks from the highs on gold to be noise, and just normal pullbacks that occur after large base breakouts. We often see these pullbacks to near the top of the prior base to shake out weak hands, but for those looking to top up exposure, these are typically buying opportunities. Any pullbacks to the $1,370/oz level would provide a very low risk entry to either start or top up gold positions as significant prior resistance levels often become new support.
The gold bulls have shown a complete change of character the past six months as they’ve trampled the bears on rallies, and not given them any rope whatsoever when it comes to pullbacks. The key now will be if the bulls can keep any corrections shallow, and play defense where they need to at $1,325/oz – $1,365/oz. If this area is defended, being long is not wrong in the metal. The 10-year breakout that occurred in late 2003 also saw the price of gold return to the top of its base for a brief re-test before blasting higher, and investors should be watching closely for a similar opportunity over the next several weeks.
While there are no guarantees that gold must head higher or perform anywhere like the magnificent run we saw from 2004 to 2011, a powerful bullish setup is now there for the first time in 15 years. It looks like the gold bulls may finally have their day in the sun again, but I don’t see any need to chase miners or gold at these levels. Fortune favors the patient, and a brief pullback to shake out weak hands is where I’m looking to establish new positions. If it does not materialize, I will look for new setups at higher prices to establish positions. It’s very likely we are now in inning one of a new cyclical bull market for gold, but this thesis is predicated on $1,325/oz being defended on a monthly close. Below there, and this breakout begins to look a little more suspect. For now, my planned course of action is to hold, and take advantage of any sharp pullbacks to add new positions in miners and or the metal.
About the Author
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year