Last week we wrote that the 2016 bull market in Gold and gold stocks had gone
off course. It had moved too far out of the historical boundaries to remain
a bull market. There was also other evidence of such including but not limited
to rising real yields. Gold's last hope was to hold $1200-$1210 and rebound
back to the highs. It has broken bull market support ($1200-$1210 and $1230)
and could be on its way to $1050 in the next few months.
The monthly candle chart of Gold is shown below. Gold is down 7.4% on the
month and has sliced through the important support at $1200-$1210 as well as
the 20-month moving average at $1201 and the 40-month moving average at $1231.
The 40-month moving average has been an excellent primary trend indicator throughout
Gold's history. There is a little support at $1150 but nothing standing in
the way of Gold heading for a retest of its low at $1050.
Gold is not only weak in nominal terms or US Dollar terms but it is showing
weakness in real terms. Below we plot Gold against foreign currencies (the
US Dollar basket) and the NYSE, a broad equity index. Gold/FC has been strong
for several years but it has lost support and looks headed lower. Meanwhile,
Gold/NYSE lost support at its 400-day moving average and could retest its 2015
low.
Gold is clearly broken but its decline is due for a pause. Gold has been strongly
correlated to the bond market which may have made an interim low last Wednesday.
Also, the gold stocks are showing a positive divergence. Even as Gold lost
$1200/oz and traded down to $1171/oz, the gold stocks (GDX, GDXJ) did not make
a new low. Furthermore, the market has now fully priced in a quarter point
rate hike in December.
The odds favor a rebound in the days and potentially weeks ahead. Traders
and investors should use the rebound to de-risk their portfolios, raise cash
and hedge if the opportunity presents itself. Don't think about buying until
we see sub $1080 Gold and an extreme oversold condition coupled with uber bearish
sentiment.
