Monday, 28 March 2016

Analysis on the 1st Leg of Gold Bull Run of 2016 in 4 Charts

I want to analyse the 1st leg of the gold bull run that started in early 2016. More importantly, I'll also look at the pullback on this 1st leg up.

I believed in the start of gold bull run this year, and this leads me to buy ABX late last year in 2015. You can read my purchase in this post. But on 9 March, I sold my ABX as outlined in this post.

I till believe that this is just a start of the multi-year gold run, but in the short term, I believed there will be pullback. This spurred me to sell ABX.

4 month Barrick gold (ABX) chart as of 25 March
4 month Barrick gold (ABX) chart as of 25 March
Please note typo in date in annotation. Should read "15 Feb", not "15 Jan"
(Click to enlarge)

4 month gold chart as of 25 March
4 month gold chart as of 25 March(Click to enlarge)

 Technically Speaking 
On hindsight, I sold my ABX holding 5 days too early. That is, 5 trading days before ABX peaked at 17 March. Actually, gold already peaked at 11 March, 2 trading days after I sold ABX.

I meant to just buy and hold ABX, but couldn't resist a swing trade.

I sold it essentially based on 2 sets of sell signals.

1.  All 3 technical indicators in both charts above show negative divergences since 15 Feb. I sold ABX 10 days after these negative divergences.
2.  Despite all the events that are positive for gold price - Draghi's big bazzoka, Fed dovish statement, Brussels bombings - their upward effects on gold price all lasted for only a single day. In the case of Brussels bombings, its small price increase lasted less than 24 hours, and followed by a largest one day drop in gold price this year.

The bottom line is, despite all these positive events for gold prices, the negative technical divergences in gold and gold stocks remain, and it had never made new height.

If it weren't for these numerous gold-price boosting events like the Fed's rapid-fire of dovish statements, it would have been corrected sooner.

 Fundamentally Speaking 
Ok, we just looked at the technical signal of near term bearishness in gold. Now, let's look at some of the fundamental reasons for this near term bearishness in gold.

4 month 10-Year T-Note Yield chart as of 25 March
4 month 10-Year T-Note Yield chart as of 25 March(Click to enlarge)

4 month US Dollar Index (DXY) chart as of 25 March
4 month US Dollar Index (DXY) chart as of 25 March(Click to enlarge)

4 month US stock market (S&P 500) chart as of 30 March
4 month US stock market (S&P 500) chart as of 30 March(Click to enlarge)

There are 4 fundamental factors for the gold bearishness in the short term that are suggested by these 3 charts.

1.  10 Year T-Note bottomed in 11 Feb this year. Shortly afterwards, negative divergences started to appear in gold and gold stock prices in 15 Feb. T Note yield and gold has a negative correlation. When yield goes up, gold goes down.

2.  DXY also made a bottom in 11 Feb, although not the lowest bottom this year. Like 10Y T-Note Yield, DXY also has a negative correlation with gold.

3.  S&P 500 also made a bottom in 11 Feb. Surprise, surprise. Need I say that S&P 500 and gold also has a negative correlation. Are you still surprise?

4.  Simply put, gold had been overbought in the short term.

It seems all 4 markets - bond, currency, equity and gold - are all correlated at this stage, thanks to the Fed.

And the major bottoms in 3 markets occurred in 11 Feb causes the gold price to gradually lose its momentum. DXY is the chart where it made a new bottom since 11 Feb. But T-Note is the most important of all market in its effect on gold market. The Fed action is to cause an impact on the treasury. The rest is all rippled effects flowing from the treasury market.

Curiously, or maybe not so curious at all, crude oil bottomed in this pivotal date of 11 Feb 2016. If US equity market is in synch with crude price, then bottom in both crude and equity wouldn't a logical outcome.

 Looking Ahead 
This is the 1st leg of the gold bull run, and needs to have some kind of consolidation before another more sustainable leg up.

My guess is, gold continues its correction - albeit mild and gradual - during the month of April.

Nobody knows how low it goes. The important levels to watch for includes 1200, 1180 (break out), 1140 (200 day average), 1100, and 1075 is the lowest I expect it to drop. Any lower, I'll have to re-evaluate about this being the start of a gold bull run. But that's quite unlikely scenario. I think the most likely scenario is 1140 (200 day average) and above.

As always, will see how the data play out, and adjust our views accordingly.

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