“But it ain’t about how hard you’re hit. It’s about how hard you can get it and keep moving forward.” — Sylvester Stallone in Rocky Balboa
Yo Adrian! There’s an intense battle going on here within the gold market.
Fighting out of the red corner are momentum traders, nouveaux bulls, and of course, honey badgers. This group is bearish on gold (GLD) as the trend is firmly down, momentum remains weak, and the belief in the Goldilocks economy and QE free lunch has never been stronger. This is currently the consensus group and clear favorite.
In Rocky IV, the gold bears would be Ivan Drago.
Fighting out of the blue corner are mean-reversion traders, contrarians, Austrian economists, and of course, gray-haired bears. This group is bullish on gold as downside momentum is getting stretched, the gold-to-XAU (Philadelphia Gold and Silver Index) ratio is at record highs, sentiment remains bearish, and the Federal Reserve continues with its most accommodative monetary policy in history. This is currently the contrarian group and clear underdog.
In Rocky IV, the gold bulls are most definitely Rocky Balboa.
As the chart below indicates, much like Drago, the gold bears are out to a strong early lead, with momentum in a very weak position (-8%/25% over the past 26-/52-week periods) and the long-term trend firmly down (trading below a downward-sloping 30-week moving average).
Gold bulls are clearly beaten down, but they are not yet out. However, this is the final round, and much like Balboa they need a knockout to win. In this case, a knockout would require gold bulls to hold above the June lows and begin an advance that would take prices above the August highs, generating a much-needed higher low and higher high on the weekly chart.
Factors supporting gold bulls include:
1) Weakening downside momentum with a higher low in RSI and MACD here than the June low.
2) An improvement in the silver-to-gold ratio as compared to the June low. When this ratio is trending higher, it is more often than not bullish for gold prices.
3) A record high gold-to-XAU ratio. If mean reversion still exists, a reversal in this ratio should provide support for the gold miners (GDX), and by extension, gold.
4) Fed policy is still the loosest in history and the Yellen nomination likely means more of the same. While investors are quite sanguine here that this will not lead to inflation (Goldilocks thesis), history has shown otherwise.
5) Gold sentiment and COT positioning remain favorable as investors are bearish and underweight the metal.
Bottom Line
We are in midst of a fierce battle over control of the gold market. Gold bears are currently winning, and they have downward momentum and trend on their side. However, gold bulls have a number of factors in their favor that could signal a turning point here. For this to occur, though, the bulls need to fight back now and hold the June lows.
If they cannot, and we see a lower low below the June low, that knockdown would likely be too much for even Rocky to come back from.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
