The price of gold got crushed yesterday. The shiny yellow metal fell $6 an ounce in a combined reaction to the FOMC statement on interest rates and heightened tensions in a potential trade war with China.
Now… a $6 drop in the price of a $1,200 asset amounts to less than a 0.5% decline. So, if we step back from the emotion of the move for a moment, it seems an exaggeration to say gold got “crushed.”
At this point, though, after two straight months of almost daily declines, a $6 drop feels like a crushing blow. At yesterday’s closing price of $1,227 per ounce, gold is down almost 7% since mid-May. It’s down more than 9% from its April high of $1,360. And the metal has fallen below its low from last December.
Anybody who bought gold at any time over the past year is now losing money on the trade.
That’s what it means to be “crushed.”
But there is some good news for those who want to hear it. I suspect, though, that most readers would rather ignore the metal at this point. The action in gold has been so disappointing for so long that to look for anything positive feels almost abusive at this point.
That is, however, what gold does. It tests the limits of investors’ patience. It shakes out the weak holders who don’t have the time or the inclination to sit through such silliness. Then, once most investors have moved on to other assets, gold kicks off a blistering rally that appears as if from out of nowhere.
That’s what happened last December when gold rallied 10% in six weeks. It happened last July when the metal gained 12% in two months. It happened in the summer of 2016 when gold jumped 10% in just four weeks. And it happened in December of 2015 when gold bottomed at $1,050 per ounce and was trading 20% higher two months later.
That’s the sort of move I think gold is gearing up for right now.
Of course, I’ve been saying that for a while and gold has done nothing but fall. Some readers have threatened a mutiny unless I change my bullish stance on the barbaric old relic.
But I can’t do that. The conditions today in the gold market are just too similar to other major bottoms in the metal.
For example, investor sentiment towards gold – a contrary indicator – is about as bearish today as I have ever seen it in my 35-year career trading gold. The Commercial Trader (aka the smart money) net short position in gold futures contracts is below 70,000 – a level consistent with important bottoms in the price of gold.
And there’s positive divergence on several technical indicators on the chart of gold. Take a look…
As the price of gold has been falling over the past few weeks, several momentum indicators have been rallying. This sort of positive divergence is often an early warning sign of an impending change of trend.
But gold needs to show some strength right here, right now in order to get a rally started. If gold can rally and form a higher high on the chart – a move above $1,233 per ounce would do the trick – then the momentum on this chart will shift from bearish to bullish. That sort of action would likely signal the start of an intermediate term rally phase for the metal.
That’s when I’ll be looking to add more exposure.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today, a Market Minute reader praises the letter’s value…
Jeff’s Market Minute today gives a good example of the value this guy brings. Also his July 2 issue, on the same topic. Actionable info in both issues. I bought XLF back then, at 26.60. Today it’s printing 28.24, a 6% move in one month. Then in today’s email, he alerts you to consider taking profit, and what to watch for in making that decision!
– Doug
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