Gold: Bulls Remain In Control

It’s been an eventful couple of weeks for the yellow metal (GLD) as gold’s rally was derailed by a 7% daily drop in mid-August, and a drop to nearly $1,850/oz the following day. However, while this has certainly put a little doubt in some market participants’ minds, it’s worth noting that zero technical damage has been done to date.

This is because gold continues to trade above its key monthly moving averages, and the metal remains above its all-time high breakout made in late July.

While bullish sentiment continues to be a minor headwind to future rallies, I see no reason to give up on the metal here, and I ultimately expect that we’ll see another set of new all-time highs before year-end.

(Source: TC2000.com)

The gold price’s recent correction has put what looks like a severe dent in the Gold vs. S&P-500 (SPY) ratio, with the ratio making a lower low and a lower high since April.

However, while we certainly have seen a slight departure from the strong uptrend we saw in Q1, it’s worth noting that this ratio remains above its key moving averages despite being up against one of the strongest rallies in history in the S&P-500.

Currently, the S&P-500 is up over 60% in less than 115 trading days. The fact that the Gold vs. SPX ratio has held its ground regardless of this near parabolic advance is incredible.

(Source: TC2000.com)

As we can see, if we take a bigger picture view, this ratio finally turned in early 2020 and reclaimed a multi-year resistance level (white line) dating back to 2011.

This was a significant change in character for the bulls and suggested that it was time to begin adding some gold exposure and miner exposure to one’s portfolio.

However, even though this pullback has pushed the ratio down from 0.65 to 0.56 since April, the ratio remains above the short-term momentum line (green line) and the long-term moving average.

Notably, the long-term moving average is turning and finally assuming a positive slope. Therefore, while this correction in the ratio could go on a little longer, I see no reason to lose faith in this ratio’s ability to maintain its bullish posture. Based on this, an allocation to gold and miners continues to make sense.

(Source: TC2000.com)

If we zoom into the 4-hour chart below, we are clearly wading through a short-term correction, but the correction structure has been very normal. Other than the one-day plunge on August 11th that brought with it a significant increase in volatility, gold has been carving out a bullish continuation pattern since.

While there’s no reason to believe that gold is going to head higher in a straight line from here, this pattern suggests that further consolidation would not be surprising, but the worst-case low for this correction is likely to be $1,800/oz.

Therefore, any re-test of the August 11th low or undercut of this low would be an area to look to add some exposure incrementally.

(Source: TC2000.com)

If we zoom out to a big picture view, gold couldn’t look more bullish, as it’s just emerged from a nearly 10-year breakout to new all-time highs.

Currently, there are no asset classes with a breakout of this magnitude to new all-time highs, suggesting that for investors looking to get in on the ground floor of a new bull market, gold is the most suitable place to be parking some of one’s money.

As long as the bulls can continue to defend the $1,890/oz level on a quarterly closing basis (September close), this breakout will remain valid.

While some investors might be getting nervous that we’ve seen the top in gold or that much lower prices are ahead, I don’t see any reason to be worried here.

While it’s possible that the metal could consolidate in the $1,795/oz to $1,2045/oz range for the next month or two to reset bullish sentiment, ultimately, I expect the metal to make new all-time highs before year-end.

Therefore, buying the metal today near $2,000/oz might not be wise; any sharp pullbacks should provide low-risk buying opportunities.

For now, I have no plans to add to my position in gold, but I remain long several miners, and long gold from $1,450/oz last year. As long as gold continues to stay above $1,750/oz, I plan to stick with my position.

Disclosure: I am long GLD, AU, KL, SILV

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The SPDR Gold Shares (GLD) was trading at $185.25 per share on Tuesday morning, up $0.42 (+0.23%). Year-to-date, GLD has gained 29.64%, versus a 10.19% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.