Fear And Greed Explorations: It's A Risk-Off/U.S. Dollar Story That Is Driving Gold

“Whenever I read the tape by the light of experience I made money, but when I made a fool play I had to lose. I was no exception was I?”

– Legendary speculator Jesse Livermore

Last Week’s Calls/Key Takeaways (Gold & Silver)

“Blame risk-on sentiment/complacency for the pullback in gold.”

“Overall, there isn’t a high probability trade to be had. I said last week that I was bearish below $118.89 and I still am. I’m looking for a tradable bottom, but I haven’t seen it yet. In the week ahead, I’ll be watching the 125-day moving-average closely. I’m sure that the contrarians out there are thinking that now is the time to start buying because others are “fearful”, but I don’t see the point in doing so at this juncture. I would wait for some consolidation to take place before wading into the water.”

“Be on the lookout for how the SLV (NYSEARCA: SLV) handles the 15.60 level. Also, watch for the MACD signal line to cross the baseline. The bottom looks like it could be forming, but still no reason to buy just yet.”

“Everybody is getting excited because the miners look to be signaling that we are going to head higher, but it’s better to wait for the bottom to be confirmed. Sure, you might have to buy-in slightly higher, but guessing bottoms in the PM markets is a great way to lose money. The same people saying that the bottom is in, after the tiniest of confirmation, were the same one’s saying silver was going to 21 and the same people who have been guessing the bottom for the last 2 bucks in the SLV. The bottom looks to be close, but it still could just be a short-term bounce. We have basically gone straight down for 17 straight sessions before the recent bit of consolidation, so waiting for confirmation is the reasonable thing to do. Being bold isn’t a good way to make money in the PM markets.”

Opening Thoughts

Last week, I called for caution and stated that a negative bias was still warranted. Gold miners were suggesting that the GLD (NYSEARCA:GLD) was likely to head higher, but the bottom wasn’t in yet, technically speaking. Also, the probability of a of a 100 to 125bp hike in June was becoming more and more likely. This led me to believe that speculators would likely engage in the strategy of longing the US dollar and shorting gold ahead of the Federal Reserve meeting in mid-June. However, the bottom in gold began to solidify over the following two days as major factors began to switch directions. The likelihood of a Fed rate hike, the sentiment driving equities, and the US dollar all began to shift course as the markets gained wind of the firing of James Comey. Perceived political risk in the US has been swelling ever since.

The two key factors driving gold lower are risk-off sentiment and a plunging US dollar. Thus, all gold investors/speculators would be wise to watch these factors. Gold will go higher if US equities and the US dollar continue their path lower.

Risk-Off Sentiment:

Last week, I outlined why risk-on sentiment/complacency was the primary driver of gold’s push lower. The S&P 500 (NYSEARCA: SPY) had broken out of a month-long consolidation period, and the VIX had worked down to a 23-year low! Well, risk-off sentiment, due to political developments, has begun to grip the markets and now gold is heading higher.

It looks like the risk-off sentiment is likely to continue. The S&P 500 sold off 1.82% on heavy volume and the CBOE Market Volatility Index was up 46%! I think it’s reasonable to assume that such action isn’t merely a flash in the pan given the fact that the political risk narrative has been snowballing faster and faster. The Senate Intelligence Committee has invited the former F.B.I. Director James Comey to testify on reports that the President asked him to end the investigation into Michael Flynn. Furthermore, there’s already over half a dozen Republicans that are calling for Comey to testify and I expect this number to grow. House Oversight Chairman Jason Chaffetz, a prominent Republican who represents Utah, is one of the individuals who has called for Comey to testify. Furthermore, Mitch McConnell, Senate Majority Leader, has called for Comey to testify. It looks like James Comey will likely testify next Wednesday at 9:30 am.

US dollar:

The US dollar was on a path higher until the news about Comey, on May 9th, reverberated through the markets. The weakening of US dollar has three main drivers behind it. First, the increasing political risk is a huge factor. Second, the probability of a Fed rate hike has been declining. Last week, the CME FedWatch Tool had the probability of a 100 to 125bp hike at 83%, but the current reading only shows a probability of 64%. Third, Europe continues to look more and more appealing. Europe’s political risk is subsiding as the US’s is increasing, and the Eurozone economy continues to strengthen. Furthermore, for the first time since 2014, the balance of speculative traders think that the euro will rise in value.

(A look at volatility in the GLD over the past year. (ATR on top and the Standard deviation on bottom))

(A look at the correlation between the GLD and the SLV over the past year. (Red = 10 day correlation, Blue = 20 day correlation, and Green = 60 day correlation) – (essentially you have half a month’s correlation, a 1 month correlation, and a 3 month correlation.))

The COT Report

I think COT reports are much more useful when put into a historical context. Thus, I want to see how bullish or bearish the most recent reports are relative to the most bullish and bearish positioning over the preceding 5 years. A reading of 100 would represent a given group being more bullish than they have ever been over the past 5 years and a reading of 0 would mean that their current position is more bearish than they have ever been over the past 5 years.

The prior reading had commercial producers/users in the 21st percentile and speculators in the 70th percentile. The current reading has commercial producers/users in the 27th percentile and speculators in the 56th percentile. These are middle of the road readings, so they are not highly useful. Essentially, both commercial producers/users and speculators are saying that gold is neither particularly cheap nor expensive.

Ichimoku Cloud Analysis

(The chart is of a 1-year time frame) – Tenkan-sen = yellow, Kijun-Sen = blue, Span A = yellow, Span B = blue, Chikou span = grey)

Overall, the picture is bullish, but the bullish shift has happened so fast that not all the indicators are bullish. The trend is bullish with the price above the Kumo and a bullish Kumo twist is about to occur. The Kumo is the green cloud area on the chart shown above. Furthermore, the price is above the fast moving-average and the slow moving-average. However, the fast moving-average is below the slow moving-average and the Chikou Span, the grey lagging indicator, isn’t confirming the bullish trend.

Support/Resistance

Major Support – 119.32

Minor Support- 117.79

Moving Averages

((The chart is of a 1-year time frame) – moving averages: red = 5 days, orange = 9 days, yellow = 13 days, green = 20 days, blue = 50 days, purple = 125 days, grey = 200 days)

The bulls are in full control with the current price above all seven-critical moving-averages. The most positive technical development is the GLD reclaiming the upward trend line that was started back in December of 2016. Also, the trend of higher highs and higher lows is still intact. I will remain positive on the GLD’s prospects as long as the GLD stays above the 50-day moving-average.

5-day moving average: 117.58

9-day moving average: 117.08

13-day moving average: 117.53

20-day moving average: 118.79

50-day moving average: 118.72

125-day moving average: 115.84

200-day moving average: 119.06

MACD & RSI Provided for Further Context

MACD: Both the base line and the signal line are below zero, but a bullish crossover has just occurred.

RSI: Is currently at 57.36 which is a middle of the road reading.

The Bottom Line

Overall, the prevailing sentiment of the markets, technicals, and macro factors suggest that gold goes higher. I’ve been playing the rise in gold through 3x ETFs. However, I don’t recommend 3x ETFs for newer speculators. Lastly, I will re-enter the GLD once it gets back above 120, which provides for a high reward to risk speculation.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GLD over 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.