Is the rally in gold prices over?
If you only believed what you saw on social media, you’d think the answer is yes. All it took was one day with a decent, downward move in gold prices for investors to declare the rally over. This behavior tells me that the opposite is true. The uptrend in gold isn’t over at all.
Why is the narrative seemingly shifting overnight? Because, for now, the Middle East is quieter than it was. I talked about the idea for a few weeks that gold’s move higher might have been warning about war. We subsequently saw Iran and Israel levy tit-for-tat attacks against each other, but thankfully, it does not appear a larger conflict is at hand. If gold was rallying on fear of war, you could argue it makes sense that it’s falling as war concerns recede.
But I still believe gold continues to send a warning. Nothing has changed on that end. As a matter of fact, I’d argue that bears remain in control, and that big money wants to stay away from stocks right now.
How could that be the case following two strong up days? Because bears don’t remain in control by shorting stocks, but rather by allocating to defensive sectors in strong rallies. Most institutions don’t short. These are facts. They best they can do is lower their factor exposure.
Monday and Tuesday of this week so far have seen a strong rebound in equities, presumably on the same catalyst as gold’s fall. In other words, investor sentiment on stocks is improving because the Middle East looks calmer than it did last week.
But it doesn’t look like a convincing move. Utilities are still largely outperforming the broader equity market into this relief bounce. If this move were to have legs, you should not see the most defensive sector of the stock market leading it.
So, we have a rebound seemingly happening in equities following last week’s selloff, ongoing outperformance in defensive sectors like utilities, and traders very trigger happy to believe that the gold move is over. That doesn’t sound like we are out of the woods yet. If anything, this could be an opportunity to position further into gold.
Either way, when all it takes is one or two days for a narrative to totally flip, be skeptical. That’s often exactly how sustained runs happen. Gold prices are likely going nowhere but up.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
