Has Gold Bottomed?

Gold prices have rallied this week, with the precious metal complex possibly having completed its multi-month corrective period. The yellow metal, which had fallen by approximately USD $130oz since early 2018 (see chart below), found important support after trading as low as USD $1,238oz on the 3rd of July, and is now sitting closer to USD $1,260oz.

Silver has also found a bid reclaiming the USD $16oz level, with the gold to silver ratio (GSR), currently sitting at almost 78:1, which has remained largely unchanged over the last month. 
 

Whilst gold still faces a number of headwinds, the move over the last three days is encouraging for bulls, especially as gold enters a seasonally strong period for the yellow metal.

The chart below highlights this point regarding seasonality, demonstrating that between 1975 and 2016, gold was essentially flat during July, before posting positive monthly gains from August through to February of the following year.

More important than the seasonality factor is that a number of technical and sentiment indicators suggest the gold sell off of the last three months may have reached an exhaustion point, with higher prices on the way.

The earlier chart looking at the gold price in USD includes two of those technical indicators, MACD and RSI, both of which are at levels that typically precede a rally in the gold price.

Another example was a recent update of the Hulbert Gold Newsletter Sentiment Index (HGNSI). The HGNSI index reflects the average recommended gold exposure amongst a subset of short-term gold timers.

The HGNSI index has typically been inversely correlated with gold market movements, meaning when sentiment is high, gold prices are likely to ease, and vice-versa.

As you can see from the below image, the HGNSI now has a reading of minus 13%, one of the lowest readings over the past two years, which prompted Ronald Stoeferle, the well known author of the In Gold We Trust report, to tweet; “Mark my words: the lows in gold is in!”
 

The HGNSI is of course not proof of that, but it's a powerful indicator, and highlights clearly just how poor current sentiment toward precious metals markets is, which is a great sign for long term investors.

Gold Stocks Sending a Positive Message

Performance of gold stocks, both in absolute terms, but especially relative to gold, are also worth monitoring, as they act as an another indicator of potential gold market movements. Typically, gold stocks underperform physical gold to the downside, but outperform to the upside.

On this score, we are seeing encouraging signs, with gold stocks actually holding up quite well over the past few months. The chart below looks at the performance of GDX, an ETF with exposure to some of the largest gold mining companies on the planet.
 

As you can see, whilst GDX has fallen since its huge rally in 2016, and indeed since the earlier highs in 2018, it’s held up relatively well over the last month or so. Indeed, according to this update, “the price action in GDX has gotten extremely tight which often happens before a market experiences a big move. The same thing happened in 2016 where a fake breakdown lower was followed by a massive increase in buying pressure and trading volume which produced a phenomenal rally in gold stocks.”

A look at the performance of the Australian Gold Miners reinforces the positive view, with the chart below showing a series of higher highs and higher lows over the last few months.
 

Futures market positioning is also encouraging, with the latest CoT report indicating that commercial players have significantly reduced their short positions, whilst managed money speculators have also wound back their bullish positions, which combined, is another positive sign.

Finally, there is this chart, which came from an update on smart money tracker, which you can access here. As the author stated; “If one wants to be a contrarian and buy low when no one else is bullish then I think gold qualifies. The weekly stochastics are deeply oversold and everyone is bearish. Maybe we printed the bottom Friday, or maybe we still have a little further to go. I don’t know. But I do think the conditions have been met for a contrarian trade.” 

By no means is the “coast clear” for gold, and we may well see a re-test of the low USD $1,240oz level in the coming weeks, especially if the USD rallies and or stock markets rally.

But the data and the charts we’ve included highlight an undeniably strong possibility that we’ve reached an important low in the USD gold price, with higher prices to come.

Until next time.
Jordan Eliseo

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.