RING - Was That The Bottom For Gold (Technical Analysis)

2023-07-18 16:40:00 ET

Summary

• Recent market action suggests that gold may be violating the typical seasonal trend by rallying ahead of schedule.
• Lower inflation used to be, in a sane world, bearish for gold, but these days, because falling inflation promotes a more-dovish Fed, it's bullish for every asset class, including gold.
• The recent market action has been very encouraging, but a few days of trading wouldn't be enough for me to consider that gold has already bottomed.

By Brien Lundin

Recent market action suggests that gold may be violating the typical seasonal trend by rallying ahead of schedule.

If seasonality were the only factor in play for gold, I would expect the metal's price to languish another couple of weeks or longer.

But seasonal trends join a long list of other factors - for gold and every other asset class - in being overwhelmed by the influence of Federal Reserve monetary policy.

In that regard, the yellow metal suffered along with other sectors after the Fed tempered its rate hike pause with warnings of continued hikes to come. Subsequent hawkish rhetoric kept any exuberance at bay.

But a funny thing seems to be happening, right now, on the path to Powell & Co.'s next promised rate hikes. With inflation falling according to plan, the markets are looking beyond the central bankers' next over-reaction via continued hikes and considering the big picture.

And that big picture is this: By promising one or two additional quarter-point increases, the Fed has essentially announced the end of this rate hike cycle.

In short, whether we have one or two small increases, this hiking cycle is peaking .

Thus, the markets - bonds, stocks, currencies, and metals - are beginning to look ahead toward the "next big thing"… which would be rate cuts.

If you're looking for evidence that everything is driven by Fed policy, look no further than the market reaction to last week's muted CPI number. Lower inflation used to be, in a sane world, bearish for gold. These days, because falling inflation promotes a more-dovish Fed, it's bullish for every asset class, including gold.

So gold soared $25 on Wednesday or 1.30%. Silver put its own stamp of approval by leaping nearly a dollar, or over 4%. Gold spent the next day consolidating its gains, adding just a few dollars to its price.

But the big news on Thursday was once again silver, which added another $0.74 (3.07%) to $24.85. (Generally, platinum and palladium have been tagging along in these rallies.)

Since Friday, both gold and silver have traded sideways, with gold losing a few dollars and silver losing a few pennies.

Is This Enough To Call A Bottom?

The recent market action has been very encouraging, but a few days of trading wouldn't be enough for me to consider that gold has already bottomed. So let's consider a few longer-term charts that bolster my case.

Looking at a one-year chart of gold itself, we see that the recent rally has the price challenging the 50-day moving average once again from the downside. A breakthrough would be helpful, but we have another early indicator here…

The GDX index of gold mining stocks has decisively broken through its 50-day moving average. The following chart reveals why this is important.

As you can see from the above chart, the gold/GDX ratio has been falling rapidly (the recent uptick notwithstanding), revealing the considerable outperformance of the gold mining stocks. This is a classic sign of the early stages of a gold price rally.

But perhaps the most noteworthy move of recent days is shown in the following chart…

The Dollar Index, as you can see, has been in free fall.

I took some heat last month when I warned readers that the drop in the dollar was getting significant, whereupon the greenback immediately rallied back to 103. That has since proven to be merely a counter-trend move, though, as the DXY followed up with a steep nose-dive.

Importantly, last Thursday, it fell through the 100 level, which was important both technically and psychologically (if there's any difference).

After the free fall of the past couple of sessions, the Dollar Index is essentially flat today, trading just barely in the green. Similarly, the gold stock indices are nearly unchanged and, as I said, gold and silver are off just a bit as I write.

So the trends I've outlined above are taking a pause today.

But I expect this to be merely a pause... and for these trends to continue as investors across the globe continue to factor in a Fed that is likely to lead all other central banks in the interest-rate down cycle.

Bringing it back to my original point, the evidence is mounting that gold has bottomed earlier than we expected. If so, this adds considerable urgency to my ongoing recommendation to accumulate the remarkable bargains throughout the junior mining sector.

Original Post

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