Gold…A Market Marked by Time & Temperament

  • Gold sentiment is evenly divided
  • Market sentiment is short-term bearish…giving way to a bullish disposition
  • The U.S. Fed has painted a poor economic outlook; soft rates near zero till Q4 2022
  • Europe looks to be in a deeper economic dislocation than the U.S., so gold trumps $ and €

The are many great debates in the world of financial investing. Active versus passive management, sector rotation, dynamics versus comparative statics and technical or fundamental analysis.

One may accuse me of fence sitting when I say my position is to blend all the above while varying the weights assigned to any given strategy on a free-flowing basis. Only then can one have a chance of reading the patterns with a degree of accuracy.

To illustrate the point, consider the technical outlook for gold. It is so evenly split, i.e. it offers a beautiful blend of opportunity for the short and longer-term investor.

Time technicals gold futures

Figure1: Time Technical Outlook For Gold                                                                                                                          Source:  , Spotlight Ideas

The almost perfect split in the time-based technical sentiment for gold illustrates that so far, despite all the economic woe that has befallen the global economy the yellow metal has proven incapable of breaking and holding the line above USD1800/Toy Oz.

This is frustrating and disappointing as this past week it was given a “golden” scenario (please excuse the pun) after the Fed Chair, Jay Powell set out a gloomy portrait of the U.S. economy. His statement on Wednesday said that the U.S. economy faced a long and difficult path to recover from the COVID-19 pandemic.

This meant rates would be held near the zero bound until at least Q4 2022. The fact that there had been in increase in the COVID-19 case count in the states that had been early to reopen also had a negative impact on risk asset sentiment. This much is seen by the sudden rise in the level of the VIX.

CBOE VIX 12 month

Figure2: CBOE VIX 12-Month (Upper)  Daily % Change, +/- 2σ Movements (Lower)                                                                                                                          Source:  , Spotlight Ideas

Figure 2 shows how the commentary from Jay Powell saw the VIX soar from 24.52 on Monday, June 8 to 40.79 on Thursday June 11. The highest level since April.

In Figure 3 one can see that the past week has seen gold fail for a fifth time to stage a break higher. However, if one believes the scenario of the Fed, this may be a slow burn opportunity. One could be an early bird seller this week and step back into the market with a view of better prices to slowly emerge right through till the end of 2022.

The Fed is taking a stance that will sap the strength of the Dollar and I am not being fooled by any bounce in the level of EURUSD. The Eurozone is going to endure a lopsided recovery and is likely to shrink between 8% and 12% this year as it struggles to overcome the impact of the coronavirus pandemic. In addition, it will see renewed squabbling over how any regional funding is to be allocated.

I am inclined to favour an increase in my gold allocation over the next few days as I adopted a patient approach for gold to glitter.

gold one month chart

Figure 3: Gold August 2020 *GCQ0) One-Month Chart                                                                                                                          Source:  , Spotlight Ideas

I will let the market open and if there is selling down to USD1720/Troy Oz I will step with new purchases.

The stop loss on that would be set at 1700, i.e. a loss of 1.16%, but I am looking for new growth in gold, not as an inflation protection…there is no inflation. Instead I seek slow and steady gains that will eventually embrace USD1900/Troy Oz, if not even more.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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