Hold Your Breath, Gold Bulls

August 25, 2018

Summary

  • Dollar strength is still acting as a headwind for a gold turnaround.
  • The gold bulls still have a chance at reversing immediate-term trend.
  • But they must act fast before downside momentum overwhelms them.

The battle for control of gold’s immediate trend continues as currency traders and bullion investors alike focus on a key level in the U.S. dollar index. In today’s comments we’ll discuss the improving odds for a gold turnaround in the immediate-term in light of the latest evidence. However, the current market environment is still technically bearish and favors holding cash over gold.

Gold prices were lower on Thursday as the U.S. dollar index (DXY) rose in response to the Federal Reserve affirming its intention of raising interest rates twice more this year. Meanwhile trade tariffs for both the U.S. and China took effect, which made for a nervous trading environment in the gold market. Washington slapped tariffs of 25% on $16 billion worth of Chinese goods entering the U.S. while China reciprocated, according to news reports.

In response to the news, bullion prices snapped a four-day winning streak and were down by about 0.80% on Thursday. December gold futures failed to stay above the widely watched and psychologically significant $1,200 price level. More importantly, the key 15-day moving average proved to be too much for gold to overcome and the bulls backed off after being unable to overcome this important immediate-term trend line.

My gold proxy, the iShares Gold Trust (IAU), shows the dominance of the 15-day moving average in the last few months. The graph below is a snapshot of IAU’s progression since late May and it continues to tell the same story it has all summer, namely that the bulls have been unable to muster enough strength to push the ETF’s price above the 15-day moving average. A 2-day higher close above the 15-day MA is needed to technically confirm that an immediate-term (1-4 week) bottom has been established. We’ve been on the sidelines all summer waiting for this critical signal, but to no avail.

The gold bulls still have a chance at reversing immediate-term trend.

But they must act fast before downside momentum overwhelms them.

The battle for control of gold’s immediate trend continues as currency traders and bullion investors alike focus on a key level in the U.S. dollar index. In today’s comments we’ll discuss the improving odds for a gold turnaround in the immediate-term in light of the latest evidence. However, the current market environment is still technically bearish and favors holding cash over gold.

Gold prices were lower on Thursday as the U.S. dollar index (DXY) rose in response to the Federal Reserve affirming its intention of raising interest rates twice more this year. Meanwhile trade tariffs for both the U.S. and China took effect, which made for a nervous trading environment in the gold market. Washington slapped tariffs of 25% on $16 billion worth of Chinese goods entering the U.S. while China reciprocated, according to news reports.

In response to the news, bullion prices snapped a four-day winning streak and were down by about 0.80% on Thursday. December gold futures failed to stay above the widely watched and psychologically significant $1,200 price level. More importantly, the key 15-day moving average proved to be too much for gold to overcome and the bulls backed off after being unable to overcome this important immediate-term trend line.

My gold proxy, the iShares Gold Trust (IAU), shows the dominance of the 15-day moving average in the last few months. The graph below is a snapshot of IAU’s progression since late May and it continues to tell the same story it has all summer, namely that the bulls have been unable to muster enough strength to push the ETF’s price above the 15-day moving average. A 2-day higher close above the 15-day MA is needed to technically confirm that an immediate-term (1-4 week) bottom has been established. We’ve been on the sidelines all summer waiting for this critical signal, but to no avail.

Source: BigCharts

The main obstacle to the gold ETF clearing above its 15-day MA is no secret. It’s the stubborn refusal of the U.S. dollar index (DXY) to reverse its upward trend. This trend is perhaps best signified by the 50-day moving average, which many traders and investors regard as important. For this reason the 50-day MA has psychological significance if nothing else. As the following graph shows DXY is above its 50-day MA, and despite the latest test of this moving average it has remained intact.

Source: BigCharts

As long as the dollar index is trending above its 50-day moving average, the prospects for even a short-term turnaround of the gold price are slim indeed. It was hoped for by the gold bulls, and by me, that the dollar would close under its 50-day MA in the next few days and at least temporarily weaken enough to allow gold to have a respite from its decline. While there is still a possibility the dollar will temporarily break under its 50-day MA this month, the dollar bulls still have the advantage of the DXY’s prevailing upside momentum. That’s why I can’t recommend buying gold right now on the speculative hope that the yellow metal might reverse its decline. Smart investors make decisions based on the weight of evidence, and until the odds are decisively in favor of gold going higher the best bet is to wait for the market to confirm a trend reversal.

Another indicator which hasn’t yet confirmed a reversal of the dollar’s upward trend is the dollar/gold ratio. The chart below is one that I’ve put particular emphasis on in recent reports. This ratio currently favors holding cash over gold, and as long as the dollar/gold ratio is above its rising 30-day moving average the relative strength advantage belongs to the greenback.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

*********

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

The world’s gold supply increases by 2,600 tons per year versus the U.S. steel production of 11,000 tons per hour.