No two years are ever exactly alike, but the start of the fourth quarter of 2019 looked eerily similar to the same period in 2018. Last week, the stock market was shaky, and the price of crude oil fell to the bottom end of its trading range.
In 2018, price carnage during the fourth quarter took equities, and the energy commodity appreciably lower. The S&P 500 fell by over 20% and oil by 44.9%.
In June, the gold market broke to the upside and out of a $331.30 five-year trading range. The price moved from $1266 in April to a high at almost $1560 per ounce in early September as the global interest rates fell and the trade war between the US and China escalated.
After reaching the high on September 4, gold has made lower highs and lower lows. The most recent low came on October 1 at just under $1460, $100 per ounce below its peak one month earlier. There are signs that the correction in gold will lead to a higher low and that we have not yet seen the peak for the price of the yellow metal in 2019. The SPDR Gold Shares ETF product (GLD) holds 100% of its net assets in gold bullion.
Signs that gold reached a bottom
The price of gold hit a low at $1465 on the active month December COMEX futures contract on October 1.
As the daily chart of December futures highlights, the price of gold bounced from the lows on the first day of the fourth quarter. The closing level at $1512.90 on October 4 pushed both price momentum and relative strength indicators from oversold to neutral conditions. The correction to the downside eliminated some of the overexuberance from the market. Open interest or the total number of open long and short positions in the COMEX futures market declined from a record peak at 658,944 contracts on September 24 to under 605,000 on October 1. The drop is a sign that some of the weaker longs exited risk positions.
Gold is ignoring the dollar
Gold tends to have an inverse relationship with the US dollar. However, since June, the correlation has not worked all that well. Gold broke out above its technical resistance level at $1377.50 during the week of June 17.
The weekly chart illustrates that the dollar index moved from a low at 95.645 during the week gold took off on the upside to a high at 99.33 in early September when the precious metal hit its most recent high.
The concurrent rallies in gold and the dollar index are a sign that gold is appreciating in all currencies including in the US dollar.
Skittish markets will push gold to higher highs
As we are now in the final quarter of 2019, memories of the last three months of 2018 could cause lots of price volatility in markets across all asset classes. From October through December 2018, the stock market suffered a significant downside correction, and the price of crude oil tanked moving from $76.90 to a low at $42.36 per barrel. Last year, markets moved lower on the back of rising US interest rates.
This year, many more issues face markets over the coming weeks and months. The markets will deal with the uncertainty of Brexit and the future of the UK and EU. Iran had its fingerprints all over the September 14 attack on Saudi production. Neither the Saudis nor the US has responded or retaliated, yet. The trade war between the US and China continues, and last week the US slapped tariffs on EU exports.
Meanwhile, an impeachment inquiry in the US is underway to remove President Trump from office. While he would likely survive a Senate vote, his re-election will be a highly contentious contest. It is starting to look like his challenger will come from the progressive wing of the opposition party. The potential for significant policy changes starting in 2021 could add to price variance in markets.
Volatility creates many opportunities for traders with their fingers on the pulse of markets. When it comes to gold, fear and uncertainty are likely to drive a growing number of investors and traders into safe-haven assets like the yellow metal.
The SPDR Gold Shares (GLD) was trading at $141.48 per share on Monday morning, down $0.42 (-0.30%). Year-to-date, GLD has gained 14.42%, versus a 10.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andrew 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.