Gold bugs get stepped on

Hear that?

No? That silence is all the market chatter about gold, which has spent around five years buried in the wilderness of non-trending price action after its 11-year bull market threw in the towel in 2011. The last stage of that rally—turbo-charged by (understandable) fear when financial markets unraveled in 2008-2009—ultimately fell victim to the U.S. economy’s grinding recovery, which sometimes stumbled but never fell flat on its face.

To be fair, there’s still lots of trading in gold futures, but “gold bugs”—die-hard worshippers of the yellow metal who are always on the lookout for the collapse of the U.S. dollar and the ensuing gold uber-rally—haven’t had much to get excited about in while.

Earlier this year it looked like they might have something to get worked up about. For a couple of heady months (July to early September) gold marched steadily higher, topping $1350/ounce and raising hopes prices would burst out of their long-term range. But the chart below of April 2018 gold futures (GCJ8) shows the market gave back more than half that rally over the next month, went sideways for the next couple of months (setting up a nice support level with the twin October lows), broke to new lows earlier in December—and, finally, returned to test that level over the past couple of days.

April 2018 gold futures (GCJ8), 6/20/17 – 12/20/17

Source: OptionsHouse

Aside from its obvious historical status as a “safe-haven” play in times of uncertainty, there’s doesn’t seem to be a lot of consensus about about what drives gold prices. Investment management firm PIMCO made a compelling case that real yields of high-quality financial assets (e.g., Treasuries) are a major factor over the long term1 (i.e., gold is bullish when yields are down, and bearish when they are up), but that’s not something short-term traders can hang their hats on.

Which begs the question, will gold stage a rally rather than surrender to resistance? Yesterday marked the sixth consecutive higher high for April gold (it didn’t even do that during the July-September rally), with the market making marginally higher gains each day. It may be too perfect for prices to turn tail immediately upon touching a chart level, but it is fair to wonder what catalyst could push gold more than moderately beyond resistance and into its former consolidation range.

April 2018 gold futures (GCJ8), 9/22/17 – 12/20/17

Source: OptionsHouse

A big correction, maybe? That, frankly, is what many gold bugs likely have been counting on, with increasing intensity as the bull market has lengthened. The market’s next correction is one day closer than it was yesterday, but that doesn’t mean it’s going to start with the New Year.

Gold has an annoying habit of sometimes overshooting technical targets, however, so a more significant push above resistance can’t be ruled out. The down-sloping trendline connecting the October and November highs would represent a secondary line of resistance in any attempt by gold to recapture its former bullish luster.


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1 PIMCO Viewpoints. Demystifying Gold Prices. January 2014.