Gold: the right time to buy or another trap?

Gold has been in a bear trend since 2011 exactly like Silver (as detailed here). The reasons behind this bubble deflation are multiple. A massive upward trend started back in 2008 after the global financial crisis kicked in. Gold was seen as a safe haven protecting capital and the price was driven by a speculative mania, pushing it at levels way higher than its intrinsic value. 

 

Bubble pop and context

Gold top was met around $1919 in September 2011. In the meantime, the first stock market sell off was triggered and this is where the precious metals “bubble” popped while stocks resumed the bull run. 

Players moved to stocks, leaving retail investors in denial. And just like that, average Joe ended up buying the top, gently pushed by medias which spread uncertainty and fear among retail. 

To put things in context, the main discussed topics at the time were: Nikkei falling; World bank warning Europe about the economical difficulties; Greece under the process of a second bailout and Spain and Italy put under austerity measures… 

All these elements put together alongside a global sell off were the perfect combo to frighten individuals and keep them away from legacy market. 

 

Technical perspective

Gold has done nothing but print Lower highs and lower lows until 2016. Then the lows around $1047 got quickly bought up and we saw a 30% rise in a few months. It started to print higher lows but never managed to print a single higher high. 

Now, the steady rise which started in October 2018 got stopped $1249. Even though, this resistance got tested a couple of times, this rejection is not the most bullish sign for Gold. 

A break of the previous higher lows would push it to retest the lower boundary line at $1047. This is where Gold could be in a critical situation. In case of breakdown, $989 would become the next logical support. 

 

Traded volume

Tracking the volume for gold is not the easiest task in the world. Actually we have a lot of conflicting data. Comparing the two reports beside released by LBMA, we can spot a massive difference in daily traded volume between 2011 and 2018.

In 2011, 173,713,000 ounces were traded on a daily basis. If we use the second table collecting 2018 data, we can calculate 30,200,000 ounces as the daily traded volume. This is no fewer than a 82% drop compared to 2011. 

The problem with these data are the way they are collected. The 2011 trading survey was conducted on a voluntary basis. This process allowed to gather 36 answers including market makers’. In 2018, collected data were based on trade data submitted by 42 LBMA members including market makers.

There is a massive lack of consistency in the way these data are collected. This is problematic because we don’t have any proper trade reporting allowing us to verify the accuracy of those figures. We can only trust the fact that the global traded volume is way lower than it used to be at the top in 2011. 

 

US – China trade deal

Another important macro factor for commodities is the current trade deal between USA and China. Trump has been negotiating with Xi on tariffs since early December. And the positive outcome coming from it have triggered a massive rally for stock market.

Uncertainty is slowly fading away since Us and Chinese officials confirmed they were close to an agreement. Washington may remove most if not all of the tariffs imposed on Chinese products since last year. China is also targeting a GDP progression of 6% for 2019.

On the other hand, the US dollar is stronger than ever and doesn’t seem to weaken. There is a correlation between Gold and the US dollar. When the latter increases in value, Gold tends to fall and vice versa. 

All these macro factors should be taken in account when considering a hedge into Gold. 

 

In Conclusion

Considering all the listed factors above, Gold seems to be in a critical situation. Contrary to the popular opinion, i don’t think the time has come to hedge into Gold. I am still expecting more downside and in the case this would not happen, there would be time to jump in with such a slow moving market. 

Keep in mind the highlighted levels on the chart. $1349 is a crucial resistance to break before we can print a convincing higher high. $1180 is the next support of interest and any breakdown could push Gold to revisit late 2015 lows ($1047). At this point, $989 would not be out of reach. 

 

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