Gold Upleg Momentum Building

Gold’s young upleg just enjoyed a major upside breakout, bolstering strong technicals and heralding a coming Golden Cross buy signal. Investors have started aggressively buying gold again after record-high stock markets distracted them. This gold upleg’s upside momentum is really building, portending accelerating gains in coming months. Yet sentiment remains poor, with traders still quite bearish on gold.

Virtually no one is excited about gold these days. Mainstream investors continue to ignore it like usual, while contrarians largely expect a lackluster sideways grind at best. This apathy is the natural result of gold’s recent consolidation between late February and mid-April. With 6+ weeks seeing no net progress, there was little to spark any enthusiasm. Thus gold gradually faded from speculators’ and investors’ radars.

That’s exactly why consolidations and corrections exist, to rebalance sentiment. At preceding interim highs, greed grows too intense to be sustainable. So subsequent drifts or selloffs bleed off this greed, replacing it with apathy or fear. That forces out most marginal traders, paving the way for the next major rally higher. That looks to have started just over a week ago in gold, as evidenced by multiple indicators.

Gold just surged to a major technical breakout above its key 200-day moving average, which greatly strengthens its latest uptrend. Technically-oriented traders carefully watch price action relative to this most important of moving averages. 200dma breakouts following correction-magnitude selloffs are powerful buy signals. So funds have already started moving serious capital back into gold since that breakout.

Gold’s technicals and fundamentals are both very bullish, contrary to the lingering bearish sentiment still dogging this metal. Let’s start on the price-action side, since that is kindling investment demand. This first chart simply looks at gold along with its key moving averages during its young bull market birthed near the end of 2015. Gold is now in this bull’s second major upleg, and momentum is really building.

The day after the Fed’s first rate hike in 9.5 years in mid-December 2015, gold plunged to a brutal 6.1-year secular low. Everyone thought gold was doomed, convinced a zero-yielding asset simply couldn’t compete in a higher-rate environment. Yet as I discussed a few trading days before that initial Fed rate hike, gold actually thrives in Fed-rate-hike cycles historically! Gold’s young bull since again proves this out.

Gold started surging in mid-January 2016 as the US stock markets rolled over into their worst selloff in 4.4 years, a mere 13.3% correction in benchmark S&P 500 terms. Then in early February gold broke above its 200dma decisively, like it just did again in April 2017. That critical technical breakout sparked major buying by speculators and investors alike, catapulting gold across that formal +20% new-bull threshold.

That first major upleg of gold’s new bull had ups and downs, like all bull-market uplegs. A hawkish Fed crushed gold last May, but then a major miss on monthly US jobs followed by the UK’s surprise pro-Brexit vote blasted gold back up. Ultimately this metal surged 29.9% higher in just 6.7 months after being left for dead right after the rate hikes started! But that left it very overbought, drenched in greedy sentiment.

As I warned last July right after gold peaked, it faced an ominous record selling overhang from the gold-futures speculators who dominate its short-term price action. That portended a high consolidation at best or correction at worst. These both accomplish the same mission of restoring sentiment balance, but in different ways. Consolidations bleed away greed more slowly with less pain, corrections do it hard and fast.

For several months last summer the easier high consolidation came to pass, with gold drifting sideways from its uptrend’s resistance to support. But futures speculators were still excessively long using their usual hyper-leveraged bets. So when gold threatened to break below key $1300 consolidation support, the futures stop losses started tripping. That triggered more, igniting a cascading selling futures mass stopping.

That rare event hammered gold back down to its 200-day moving average for the first time since just after this new bull was born. 200dmas are the strongest and most-important support lines within ongoing bull markets, high-probability-for-success times to buy following normal healthy corrections. So gold caught a bid and surged again into early November, starting its next upleg. All this was typical bull-market behavior.

The Friday before the election, gold was back near $1305 on mounting odds Trump’s chances of beating Clinton were growing. But the following Sunday, the FBI cleared Clinton a second time on her classified e-mails. So gold plunged the Monday immediately before Election Day. For months gold had traded as if a surprise Trump win would be bullish for it and bearish for general stocks, due to soaring uncertainty.