Wednesday, May 3, 2017

What's next for gold?

Mid-week market update: My recent sector review was well received, especially when it was framed in the context of how a market cycle rotation works (see In the 3rd inning of a market cycle advance). As I don't have much to update about the technical condition of the stock market, especially in light of the non-reaction to the FOMC meeting. The SPX remains in a tight trading range between 2380 and 2400.

Under those circumstancees, I thought that I would focus on a popular topic with a number of readers, gold. In particular, gold is important in a market cycle analytical framework. That's because inflation hedge leadership tends to mark the terminal phase of equity bull cycle.

The gold outlook
Technically, gold prices may be nearing an inflection point. As the chart below shows, gold violated its 50 and 200 day moving averages (dma) and it is now testing an uptrend line. Further weakness would be bad news for the bulls.

However, keep a close eye on the RSI reading (top panel). Charlie Bilello pointed out that gold is oversold, as defined by its RSI below 30, gold prices has historically performed well.

Callum Thomas of Topdown Charts observed that gold prices tend to be inversely correlated with the shadow Fed Funds rate. The Fed continuing tightening cycle should be bearish for gold.

Indeed, the historical record shows that gold prices (blue lines) are inversely correlated with real interest rates (red line, inverted scale). Gold is an inflation hedge, and rising real interest rates would tend to depress the price of gold.

Should investors and traders be bullish or bearish on gold? Rather than try and debate the likely path of inflation and interest rates, an analysis of the technical conditions of other inflation hedge vehicles such as energy and mining represents a more pragmatic approach to the problem.

The full post can be found at our new site here.

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