Gold – The Risk Rises With The Price

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August 20, 2019 1:15pm NYSE:GDX NYSE:GDXJ

NYSE:GDX | News, Ratings, and Charts

From Andrew Hecht

  • Lots of issues facing markets across all asset classes

  • Markets rarely move in a straight line – Will gold be different?

  • A bumpy ride higher on the horizon

Last week, the gold market did what it has been doing consistently since June. The price of the yellow metal rose to another new multiyear high. On the continuous futures contract, the price reached $1531.40, and the most actively traded December futures contract reached a peak at $1546.10 per ounce.

Gold has been shining since late April when it found a bottom at $1266 per ounce and moved through its level of critical technical resistance at the July 2016 high at $1377.50 in June. The precious metal had traded in a $331.30 range since 2014, with the low in late 2015 at $1046.20 per ounce. At $1531.40 last week, gold had appreciated $485.20 from its low and stood at $389.30 below its all-time 2011 peak at $1920.70. The gold market has made it more than halfway back to the high in dollar terms. In other currencies, gold is even closer to or above previous record levels.  At the end of last week, the price of gold was only around 20 euros below its peak 2012 record high. In British pounds, Australian and Canadian dollars, Russian rubles, Chinese yuan, and many other currencies, it has already moved to a new modern-day high.

The SPDR Gold Shares (GLD) is the most liquid gold ETF product with almost $38 billion in net assets and over ten million shares on average changing hands each day. The higher the price of gold goes, the more the risk of a correction rises. At $1531.40, gold was already $153.90 above the $1377.50 breakout level from June.

Lots of issues facing markets across all asset classes

Falling interest rates around the world have fueled the gold rally. Meanwhile, other looming problems are also creating fear and uncertainty in markets that are causing a herd of buyers to go for the gold these days. The trade and currency war between the US and China is a leading issue weighing on the global economy. The deadline for a hard Brexit is on October 31, and Prime Minister Boris Johnson has pledged that he will take the UK out of the EU with or without an agreement. Europe also faces a potential problem in Italy over the coming weeks.

In the Middle East, hostilities between Iran and the US are possible. In Asia, Hong Kong is the most significant domestic political problem for China since the protests in Tiananmen Square. At the same time, North Korea has been test-firing missiles again in response to US-South Korean military exercises. The global political and economic landscapes have created the almost perfect bullish storm for gold that pushed the price of the yellow metal above $1500 per ounce.

Markets rarely move in a straight line – Will gold be different?

While gold appears headed for higher highs, we must remember that the risk is rising with the price of the precious metal. Even the strongest bull markets experience pullbacks, and since gold took off from $1377.50, the price has not retested that level.

Source: CQG

The long-term quarterly chart illustrates that gold took off to the side in 2004 and reached a peak at $1920.70 in 2011. However, in 2008, during the global financial crisis, the price corrected from $1033.90 to $681 over seven months from March through October before it continued its ascent.

A bumpy ride higher on the horizon

Critical technical resistance for the gold futures market is at the $1377.50 level, the technical resistance since 2016 has become support. The higher gold goes during the current move, the more substantial a correction could be over the coming days, weeks, or perhaps months. At over $1500 per ounce, gold could drop by over $120 and still keep its bullish long-term trend intact. Just because gold’s next leg to the upside is underway, it does not mean that the road higher will not be bumpy at times.

Buying gold on dips is likely to be the optimal approach to the yellow metal. While gold could be heading for a new all-time high above the $1920.70 level, we will likely see lots of opportunities to buy on pullbacks. Never put all of your eggs in one basket, and the odds of a straight line to new highs are low.

The SPDR Gold Shares (GLD) was trading at $141.92 per share on Tuesday afternoon, up $0.81 (+0.57%). Year-to-date, GLD has gained 14.78%, versus a 9.78% 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.

This article is brought to you courtesy of

About the Author: Andrew Hecht

andrew-hechtAndrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.

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