Gold: Crystal Clear

Gold has rallied strongly by 2.5% so far this week amid a broad-based rally across the precious metals (excluding palladium) as a result of a strong sell-off in the dollar and a decline in US real rates, triggered by: 1) a surge in risk aversion on the back of intensifying geopolitical tensions; and 2) Trump’s rhetoric on the dollar and interest rates in a Wall Street interview.

1) Rising risk aversion is the result of growing geopolitical tensions in North Korea, where satellite images suggest the country is preparing for another nuclear test, prompting the US and China to respond more aggressively. This is boosting safe haven bids as macro traders unwind their risk-friendly positions.

2) US President Trump made interesting comments in an interview earlier this week, arguing explicitly that the dollar was “too strong” and that a low-interest rate policy was preferred. His rhetoric was sufficient to produce additional negative pressure on the dollar and US rates, producing a supportive environment for gold prices.

Gold has moved roughly 5% higher since the latest Fed’s meeting on March 15, when the Fed delivered a “dovish hike”, prompting investors to revise downward the path of the expected Fed Funds rates. The macro backdrop has therefore been very supportive of gold, which has triggered a strong speculative demand response but a more subdued investor demand reaction, as I discussed in my previous Gold Weekly.

(Source: NetDania)

Well done, bulls, including Taylor Dart, for having anticipated accurately the rebound in gold at the end of last year. While I instead interpreted the year-to-date rally as a simple positive technical retracement within a downtrend, the gold market action suggests I’m increasingly wrong.

Given the strong run-up in gold prices, I’m retrospectively happy to have set a stop loss level to make sure my short GLD bet does not go out of control. Still, my fund is down about 1% in the year to date, which is not a good start to the year, to say the least.

In my previous Gold Weekly, I presented a simple technical analysis on GLD via TradingView, in which I showed at what price levels I would be inclined to implement a significant long position.

But I feel more comfortable doing a technical analysis on gold spot via NetDania because: 1) a technical analysis on GLD is more susceptible to send misleading trading signals; and 2) my charts via TradingView can be misleading in themselves.

As a result, I will go back to my traditional technical analysis on spot gold prices.

Weekly chart

(Source: NetDania)

As can be seen below, gold managed to close on a weekly basis above its DTL from its all-time high once in 2016, but subsequently fell.

In consequence, I deduce that although a firm weekly close above this DTL by the end of the week would be encouraging, I cannot rule out renewed downward pressure in the following weeks.

The monthly chart is therefore interesting to introduce.

Monthly chart

(Source: NetDania)

As can be seen above, the DTL has never been breached on a monthly closing basis since the all-time high in 2011. It was tested a few times in 2016, but gold never managed to close above this DTL, which in part explains why I have adopted a bearish rather than a bullish bias in recent months.

The DTL is presently at $1276 for the month of April, while gold is trading at $1,286, so gold is presently above its DTL at the time of the writing. Although it would be tempted to jump on the long side from, I may refrain myself from doing so unless gold closes on a monthly basis above its DTL, which is above this crucial level of $1,276. Indeed, a monthly close above $1,276 would herald the beginning of a new bull market.

Under those specific circumstances, I would be willing to implement a long position in gold, with a risk of 3% of the fund and set a relatively wide slightly below $1,200, which is a key psychological level in the gold market.

I would be inclined to hold this position either until my stop loss is triggered or until gold makes new all-time high.

For the sake of transparency, I will publish my open and closed trades on my Twitter account and at the end of each of my Gold Weekly reports.

Good trading to the Seeking Alpha community.

About: SPDR Gold Trust ETF, Includes: PowerShares DB Gold ETF (NYSEARCA:DGL),VelocityShares 3x Inverse Gold ETN (NASDAQ: DGLD), DB Gold Double Long ETN (NYSEARCA: DGP), DB Gold Short ETN (NYSEARCA: DGZ) SPDR S&P 500 Trust ETF (NYSEARCA:SPY)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.