Gold: How To Trade The First Inning Of A New Gold Bull Market

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July 30, 2019 11:22am NYSE:GDX NYSE:GDXJ

NYSE:GDX | News, Ratings, and Charts

From Taylor Dart

  • Gold continues to show follow-through above its multi-year base breakout.
  • The current setup is quite reminiscent of the six-year base gold built between 1996-2003.
  • As long as gold does not break below its 20-month moving average on a monthly close, this thesis remains in tact.

Despite having every opportunity to sell-off over the past few weeks with sentiment and price being over-heated, gold (GLD) has barely budged and continues to build out a new base above the $1,365/oz level. With Powell on deck tomorrow, and holding the keys to boosting a slowing economy, it’s hard to imagine him not cutting rates by at least a quarter-point. This is likely what’s kept a substantial bid under gold, as market participants are not all that worried about potential short-term weakness. Instead, most of the big money is looking out 9-12 months, and at the potential for two rate cuts. They’re also likely looking at the massive base breakout in place, and its similarities to a previous base breakout that occurred nearly twenty years ago. While history does not repeat itself, it does often rhyme, and it’s worth examining the similarities between the most recent breakout of this size in gold, and how it played out.

Taking a look at the 1996 through 2003 period, and the 2013 through 2019 period, there are some apparent similarities. First, gold set its resistance line in 1996 near the eventual breakout level near $397/oz, and this level was tested twice before gold finally broke out of this range in 2003. In the current instance, gold set its breakout level at $1,380/oz in 2013, and tested this area multiple times, before the June 2019 breakout. Both bases were built over a six to seven year duration, the low for the base occurred in the middle of this period (December 2015 for the current instance, and August 1999 for the prior setup). From that low, gold then broke out roughly four years later (November 2003, and June 2019). The similarities in these two setups bode extremely well for gold in the future, given that gold soared by over 300% over the next eight years. However, it’s often in the first inning or two that many people get shaken out. What many market participants overlook is that the first and second inning of a new bull market can be extremely choppy as most people do not believe the move. It’s only after the second inning that the ride becomes much more comfortable to sit through. So let’s look at how the next two years following the 2003 breakout to see what we might be able to expect:

While monthly charts make the massive bull market in gold look like a straightforward trade, digging into the daily charts, there was quite a bit of noise as the bull market began to gain traction in innings #1 and #2. As we can see, gold ran up roughly 8% above its breakout level to $430/oz after breaking out, but then pulled back 12% to $375/oz, to approximately 4% below the breakout level. The metal then made a new high at $450/oz, before pulling back another 10% to $405/oz to make a higher low. The metal then endured one more correction of 4% from $470/oz to $450/oz before blasting off to new highs at $540/oz. While gold gained 35% over two years during this period that I’ve labeled inning #1 and inning #2, there were two sharp corrections one had to be able to sit through to ride this bull to fruition. If we were to see this play out similarly, we would see gold pullback 10% – 12% from its high near $1,460/oz at some point in the next few months, but ultimately move towards $1,840/oz by the fall of 2021. While I am less inclined to believe we are going to see that deep of a shake-out to near the $1,300/oz level in the back half of this year, it is vital to be armed with the knowledge of how the past looked so that we can take advantage on the off chance this does occur.

As of right now, gold continues to hover well above its base and is looking invincible. While I  do own a few miners, I am personally waiting for a decent sell-off to get aggressive. The crucial first support below is $1,365/oz, and the area I would begin to get aggressive is $1,325/oz. This would undoubtedly put a massive dent in bullish sentiment, and move everyone on the fence over whether this is genuinely a real move. Once the failed breakout chatter came out, it would be time to strike aggressively from the long side. No one knows the future, and anything is possible, but this is how the past played out with an eerily similar setup. Therefore, I still believe a re-test of the $1,365/oz level in the back half of the year is doable, but I think it’s a massive opportunity to get long the metal and the miners. As long as gold defends the $1,325/oz level on a weekly closing basis, I would consider any pullbacks to be noise.

The SPDR Gold Shares (GLD) was trading at $134.82 per share on Tuesday morning, up $0.29 (+0.22%). Year-to-date, GLD has gained 9.03%, versus a 13.15% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.

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About the Author: Taylor Dart

taylor-dartTaylor 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..

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