Gold Price Corrects, But The Bull Market Remains

London (Sept 14)  In 2004, the price of gold began moving higher to above the $400 per ounce level. However, it was not until 2006-2008 that the price began its trek to the upside that took the price above the 1980 peak at $875 per ounce. A look back at the price action from 2004 through 2011 when the yellow metal traded to its all-time peak in US dollar terms shows that there were more than a few periods where the gold market suffered significant downside corrections. The most severe selloff came in the aftermath of the 2008 global financial crisis where risk-off behavior sent the prices of all assets lower. Gold fell from $1033.90 in March 2008 to a low at $681 in October of the same year, a decline of over 34% in seven months before resuming its move to the upside. Four months later, the precious metal was back flirting with the $1000 level in early 2009.

Markets rarely move in a straight line, even in the most aggressive bull markets. I view the current selloff in the gold market as an opportunity. The move that took the price out of a $331.30 trading range that had been in place since 2014 was a significant technical and fundamental event for the gold market. Buying during the current price dip may cause more than a little stress at times, but there are plenty of signs flashing that gold has lots of upside over the coming months. On dips in bull markets, turbocharged products can enhance returns on price weakness, but they are not for the faint of heart. The Velocity Shares 3X Long Gold ETN product (UGLD) is a short-term tool that requires both price and time stops. However, catching a wave to the upside in the gold market with UGLD can magnify profits.

Gold falls from the high after an impressive breakout to the upside

In the aftermath of the June meeting of the FOMC, the price of gold took off on the upside. The Fed told markets that interest rates in the US would fall by the end of 2019, which lit a bullish fuse under the price of the yellow metal.

As the weekly chart highlights, gold traded to a low in 2019 at $1266 per ounce in mid-April. The level of critical technical resistance stood at the July 2016 post-Brexit high at $1377.50. Since 2014, the gold futures market had traded in a range from $1046.20 to $1377.50. In June, the price moved above the July 2016 high on its way to $1559.80 during the first week of September. The rally from the April low took gold 23.2% higher. The move through the resistance level took it 13.2% above the resistance point, which now stands as the critical level of technical support in the gold futures market.

During the week gold rose to its most recent peak, the price put in a bearish reversal as it closed below the prior week's low. The technical move along with a bit more optimism on trade and some positive economic data out of China has caused the yellow metal to fall below the $1500 per ounce level last week.

On the weekly chart, both price momentum and relative strength had risen into overbought territory. Open interest at over 600,000 contracts is close to a record high and rose to a peak at 643,5563 contracts on September 4, which was an all-time peak in the metric. The overbought condition and an overabundance of long positions created too much enthusiasm in the gold market, which sent the price back below the $1500 level.

An overdue correction

In bull or bear markets, picking short, medium or long-term highs or lows is always a challenge. Gold moved a long way in dollar terms, and it moved to new highs in almost all other currencies including the euro over the recent weeks. The only leading currencies that were still below multiyear peaks at the recent high were the Swiss franc and the US dollar.

Gold became a front-page item when it came to the business news. The rally caused more than a few analysts to push up their upside targets over the summer months. At over the $1550 level, gold became a little bit too excited. A combination of record-high open interest in the futures market, front-page coverage in the business news, and overbought conditions on short-term charts set the stage for a correction. The bearish reversal on the weekly chart appears to have pushed the precious metal over the edge. Bullish reversals on the weekly chart in late May, mid-July, and early August pushed gold to higher highs. The bearish reversal has triggered follow-through action on the downside in the gold market. Gold was due for a correction, which could cleanse the market and be a healthy event for the future.

Gold will find a higher bottom

I continue to be firmly in the bullish camp when it comes to the gold market. I do not believe we have seen the 2019 high for the yellow metal, yet. I expect that gold will continue to experience selling pressure, and that could intensify if the Fed disappoints the market on September 18 with no change in the Fed Funds rate. However, at the $1496 level on the December future contract last Friday and just under $1490 on the continuous contract, gold has over $100 on the downside before it threatens a test of the July 2016 high at $1377.50 that now stands as the support level.

Gravity hit the gold market over the recent trading sessions. The price momentum reversed and swollen open interest, and overbought conditions caught up with the yellow metal. A period that cleans the stale and weak longs out of the market could set the stage for new buyers that have been waiting for a pullback to buy gold for the first time or add to existing positions. Therefore, I expect a higher low compared to the level of critical support at below the $1380 level.

Three reasons to buy this dip in the yellow metal

Gold is shining in all currencies, which I consider a fundamentally bullish factor for the yellow metal. Since central banks around the world hold gold as part of their foreign exchange assets, the yellow metal is also a currency. Gold has a far longer history as a means of exchange than any of the world's currencies in circulation today. The rise in the price of gold is a commentary on the devaluation of fiat currencies. So long as central banks pursue accommodative monetary policies, gold will continue to rise. The Fed lit the bullish fuse with a pivot towards looser credit in June. That fuse will be difficult to extinguish. Last week, the ECB cut its short-term rate by ten basis points to negative 50 points. They also restarted quantitative easing at 20 billion euros per month starting in November. This week, we will hear from the US Federal Reserve and a 25 basis point cut is likely.

More than a few high-profile investors and traders have advocated that a bull market in gold is just getting underway. Stanley Druckenmiller, Paul Tudor Jones, Ray Dalio, and others continue to believe the price of gold is heading higher. High-profile investors tend to have herds of followers, and many will likely use the selloff as an opportunity to purchase more of the yellow metal.

Finally, from trade wars to a standoff with Iran in the Middle East and confusion over Brexit and Europe, gold has many factors on the horizon that could quickly push the price significantly higher.

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