Gold: Is $1280 A Floor Or A Sponge?

April 16, 2019

Global stock and bond markets continue to be driven by the macros of a possible trade deal, accommodative central banks, weaker earnings, continued stock buybacks, and rising government debt.

Gold is driven by these same macros, but it has the additional price driver of seasonal Chindian physical market demand.

It’s currently the soft season for physical demand, but the rest of the price drivers are quite positive.  Most big bank analysts have gold price targets of about $1400 for 2019.

Unfortunately, they don’t see gold reaching their target prices until seasonal physical demand strengthens later in the year.

This is the key USD vs yen chart.  During the September-December period in 2018, global stock markets tumbled as the Fed put pressure on the stock market with higher rates and QT on “autopilot”.

Risk-on markets (stocks and the dollar) tumbled, and risk-off markets (yen and gold) soared.  Then a dramatic about-face by the Fed in late December sent the dollar and stocks soaring.

Note that gold continued to rise until mid-February even though stocks and the dollar rallied.  That’s because of strong Chinese New Year physical market demand. 

The bottom line:  When push comes to shove, it is the physical market that ultimately determines the actions the COMEX commercial traders take and that determines the price trend.

In 2019, from February to the current time frame, risk-on markets have continued to strengthen, physical market demand continues its seasonal softness, and so gold meanders sideways with a slight downwards bias.

The chart of DIA-NYSE, a Dow proxy ETF.  From a technical perspective, the US stock market has meandered sideways since the US government launched a wave of tariff taxes. 

Then it began crashing when the Fed became more aggressive about rate hikes and QT in the late stage of the current business cycle.

The market can probably rally to around where it would have been without the “tariff tax tantrum”, but most mainstream analysts don’t see much more than 2% GDP growth over the long term for the US economy. 

It could be said that in America there are a few thousand modestly-socialist politicians and more than 300 million capitalist citizens.  Likewise, it could be said in China and India there are a few thousand fully-socialist politicians and 3 billion capitalist citizens. 

Regardless of how they vote, citizens in all three countries generally work hard to make ends meet and to build quality products… while being controlled by debt-worshipping politicians.  

Chindian citizens are in the early stages of their latest empire cycle, and US citizens are in the late stages of their first empire cycle.  A gold-orientation of the gargantuan Chindian population essentially guarantees that gold will quickly become a mainstream asset for global investment.

That’s because there is only about 1% annual growth in mine supply while Chindian citizen wealth is growing at about 6%-8% each year.  Gold demand growth mirrors citizen wealth growth.

In America, the Fed’s accommodative stance can only buy the government limited time.  The rate of annual US government debt growth is very similar to Chindian citizen wealth growth.

I’m predicting that the gold price drivers of the US government debt behemoth and the Chindian wealth trade are set to collide… in this weekly chart inverse H&S neckline zone at about $1450.  

That should push gold towards the $2000 area neckline zone of an even bigger inverse H&S pattern that targets the $3000 price area.

This is the short-term GDX chart.  I’ve highlighted my www.guswinger.com buy and sell signals on the chart.  I buy NUGT when there’s a GDX buy signal and buy DUST when there is a GDX sell signal.

This proprietary system is mechanical and investors are almost always in a trade.  The current daily chart price action in GDX is boring at best and can be demoralizing, but for swing traders, almost every day is exciting!  The bottom line:

During the strong season, core positions will make the most money for investors in the gold market.  During the weak season (now), a solid short-term trading plan reduces negative emotion, limits drawdowns, and puts money in the bank.

This is the daily gold chart.  Some investors may be concerned about the fourth touching of the $1288 June futures and $1280 cash market floor, but my question to them is:

Is this a floor, or is it a sponge?  The gold market now is vastly different (both fundamentally and technically) than it was when the price touched the $1523 area for the fourth time in 2013.  Investors should think about modest price softness on a $1280 area sponge rather than possible sharp weakness at a $1280 floor.  The $1450-$1400 price zone will become a beautiful floor as the gargantuan Chindian wealth trade and US government debt behemoth of doom collide!

Special Offer For Gold-Eagle Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “The Golden Mix!” report.  I highlight key gold and silver stocks to trade and accumulate in the gold demand soft season, with tactical action points for stock!

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form.  Giving clarity of each point and saving valuable reading time.

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Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:  

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Stewart Thomson is president of Graceland Investment Management (Cayman) Ltd. Stewart was a very good English literature student, which helped him develop a unique way of communicating his investment ideas.  He developed the “PGEN”, which is a unique capital allocation program. It is designed to allow investors of any size to mimic the action of the banks.  Stewart owns GU Trader, which is a unique gold futures/ETF trading service, which closes out all trades by 5pm each day. High net worth individuals around the world follow Stewart on a daily basis.  Website: www.gracelandupdates.com.

Gold is found in nature in quartz veins