It’s Different This Time

posted in: Charts, Gold, Gold Stocks | 0

Now that I have your attention please allow me to explain that as a financial blogger writing a post like the one that you’re about to read makes me extremely uncomfortable. Making predictions about financial markets is the fastest way to look incredibly stupid and have something that you can look back on and cringe while reading about how wrong you were.

But hey, this wouldn’t be the first time I was wrong and i’m pretty sure it won’t be the last. So here goes…

It’s not a secret that i’m a long term gold bull. However, it’s also not a secret that i’m a trader who can change his opinions regularly based upon market technicals and the macro backdrop. “Strong opinions, weakly held” is my mantra and one that has served me well over the years.

Up until two weeks ago I was fairly neutral on gold in the short term, figuring that we were still in a tough seasonal period (until mid-July) without a clear bullish catalyst on the immediate horizon. That all changed on Thursday May 30th when I wrote a morning email to Trading Lab subscribers explaining that now was the time to get bullish on gold.

Since May 30th gold has rallied roughly $70 and despite this large move my opinion hasn’t changed. In fact, i’m more bullish than ever on gold. This is literally a golden perfect storm that just keeps getting more bullish:

  • Fed funds futures are now pricing in a greater than 70% chance of at least two Fed rate cuts by the September FOMC meeting, and a nearly 20% chance of 3 rate cuts!
  • The Trump Administration is increasingly isolating the U.S. from the rest of the world, which is in turn motivating foreign powers such as China and Russia to continue to stockpile gold and create additional avenues in which to settle trade without using the US dollar.
  • Global debt and the U.S. budget deficits have never been larger and there is no sign of this global debt explosion slowing down anytime soon.
  • Developed economies are finding themselves in deflationary quicksand as evidenced by the following chart of German, Japanese, and U.S. 10-year yields

This chart was made earlier this year and the US 10-year note yield is already 40 basis points lower. Does the Fed see the U.S. fighting increasingly pernicious disinflationary headwinds? Are we on our way back to zero on the Fed Funds Target Rate?

  • With an attack on two oil tankers in the Gulf of Oman and the rhetoric between the Trump Administration and Iran reaching a fever pitch the global macro backdrop has rarely looked less stable.  Regardless of who was ultimately responsible for hitting the two oil tankers with missiles it’s painfully clear that the war hawks in the Trump Administration are yearning for a military confrontation with Iran.

I could go on and build a laundry list of bullish macro factors that support higher gold prices (eurozone, BREXIT, etc.) but you get the picture. A perfect storm is forming and gold is set to be a big beneficiary of falling real interest rates in developed economies and overall global instability.

The strongest trade setups occur when the macro-fundamentals align nicely with chart technicals. This is one of those times.

We are seeing persistent and powerful accumulation in gold mining shares:

GDX (Daily)

GDX is up ~14% since May 30th while gold is up up about 5% over the same time frame. This level of outperformance by the miners is characteristic of the early stages of a much larger bull move. We saw this happen in 2003/2004 and then again in 2009. It’s still early but the signs are there and I think it would be foolish to ignore them.

Turning to the weekly chart of gold using the simplest charting possible we can see that gold has formed a complex head & shoulders bottom with a neckline near $1370:

Gold (Weekly – 8 Year)

While this chart pattern has been talked about a lot I don’t see the herd positioning to benefit from an upside breakout – sentiment is still relatively neutral on gold and the analyst consensus still has it that gold will remain fairly stable near US$1,300 for the next year. This consensus probably won’t change until the gold price is a lot higher than it is today.

Meanwhile, the vast majority of investors are disillusioned on gold mining shares. While it’s true that the gold miners have sucked as a sector during the last decade (GDX is -26% since the beginning of 2009), I think it’s also important to realize that this is the rear-view mirror and that future returns could look a lot different.

I made a correct call on May 30th and you can consider this post to be me pressing my bet. I am bullish on gold and gold miners and while I’m not going to go out on a limb with some crazy upside price target, I will say that I think $1450 could end up looking like a conservative upside target in the intermediate-term (2-3 months).

In the last few years every time that gold peaked its head above the $1350 level it ran out of fuel and succumbed to selling pressure. It’s different this time. 

I will leave you to listen to one of the greatest hedge fund traders of the last few decades, Paul Tudor Jones:

“If I had to pick my favorite for the next 12-24 months it would probably have to be gold….I think if it goes to $1400 it goes to $1700…” ~ Paul Tudor Jones (6/12/2019)


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