Gold: It’s Time to go Long

• Gold down ~13% from its peak in 2020
• Why patience is often rewarded; and
• Why I think gold will rally over 2021 (thanks to Biden, Yellen and the Fed)

Gold has been sold heavily since the beginning of August…  

The price peaked at US$2089 a troy ounce – however has since fallen to around $1810 at the time of writing. 

That’s a fall of just over 13%. 

Before I look at the weekly chart – allow me to frame this missive with a post I sent July 31 “Gold & Silver are Hot… Perhaps Too Hot“

As part of that post I said “I like gold… but don’t buy it here”.

It was a good tip… as what goes up in a straight line generally comes down. 

I also offered some historical analysis – looking back at previous occasions where gold had accelerated too much too fast.

Below is portion of that post (for ease of reference):

There have been perhaps 9 or 10 overbought situations with gold during the past 40 years. I am going to focus on just four (where the buying was considered extreme). The specific months were:  

1. April – 2006
2. February – 2008
3. August – 2011; and
4. July – 2020

In each of these cases – our monthly RSI exceeds a value of 80.  And in every case – over the next 3-6 months – gold was substantially lower. 

For example, in 2006 we watched gold fall from 727 to 560 (down 23%). 

In 2008 gold corrected from 1014 to 707 ~30%). And in 2011 – gold peaked and then went on to lose nearly half its value. 

Now here’s something else history shows… 

There has also only ever been 4 instances (in history) when gold is up 8 weeks in a row.

Put another way, the probability of gold doing this is just 0.17% (where there are a total of 2,372 8-week periods) 

So what do we see in the months following this kind of exceptionally rare price activity?

Below are the median results over 1, 3 and 6 months 

• 1-month – down 3.3%
• 3-months – down 9.0%
• 6-months – down 1.7%

The takeaway:  

• If you have enjoyed the run up in gold the past few weeks – take at least half profit. 
• If you don’t have a position in gold – don’t initiate a long position here. 
• Look to buy gold on the next dip – for e.g., closer to the 35-week EMA (or slightly above)

Fast forward to September 21 (approx two months after the July 31 post) – and I offered the following buy zone for gold:

Gold – Sept 21 2020

Repeating my language from that time: 

“At the time of writing – gold is trading around $1,914 per ounce – well off its $2,089 high. I think gold has further to fall here – perhaps as far as $1,800 to $1,850″

With that – let’s now update the weekly chart.

Gold: It’s Time to Buy

Turns out things have “traded per the script”…  where patience has been rewarded. 

Gold – Nov 25 2020

Gold has finally moved just below its 35-week EMA whilst remaining in a long-term bullish trend. 

As long-term readers will know – this is my preferred set up for establishing a new long position. 

To be clear, it’s not a guarantee the trade will work (nothing ever is) but it’s typically a higher probability event. 

I would be a buyer of gold here around $1809 — with a stop of $1700 (for more active traders). 

If $1,700 fails – gold is going straight down to around $1,450 (which will also likely result in the trend for gold reversing) 

And the Fundamentals?

July 29 I issued a post titled “Fed Gives the Green Light to Gold“

As part of that post – I shared what I believe to be one of the most compelling charts (and arguments) for higher gold: 

Gold (Yellow) vs M2 Money Stock (Blue) 

Again, repeating my language (as nothing much has changed):  

My single takeaway from Powell’s address wasn’t his unwavering commitment to maintaining aggressive monetary assistance – it’s what this will do for gold (and the US dollar).

For example, take a look at the relationship between M2 Money Supply (managed by the Fed) and the Gold price

Whilst the relationship is not perfect – gold loosely follows the direction of money supply.  And whilst that’s likely to continue… as the cycle of QE, credit expansion and deficit spending only accelerates.

Whilst I could be wrong – I believe the following (stimulative) fiscal and monetary policies in 2021 will continue to be supportive of a higher gold price (despite an improving economy): 

• US federal deficits expanding (with further fiscal stimulus);
• US dollar remaining weak; 
• Interest rates remaining anchored at zero (or negative in real terms); and
• The Fed pursuing additional QE to fund government deficit spending

Obviously if my overall thesis is wrong (and it could be) – expect gold to trade lower. 

My general feeling is the Biden Administration is likely to be aggressive towards further deficit spending – in turn driving rapid growth in US debt. 

For instance, consider the language of Janet Yellen – soon to be Biden’s Treasury Secretary.  

“While the pandemic is still seriously affecting the economy we need to continue extraordinary fiscal support but even beyond that I think it will be necessary”

And if that’s true – this will be supportive of the gold price (in turn pressure the US dollar)

Now further to the above – November 12th I read this in the Wall Street Journal:

“Biden’s Penchant for Bold Stimulus to Test His Deal-Making Skills“

Overall – I agreed with the author’s hypothesis. 

For example, it’s no secret that Biden is a fan of FDR’s New Deal. The article cites Austan Goolsbee – a senior Biden economic advisor (who also served under Obama in a similar capacity):

“‘He loved manufacturing. He loved building — a kind of muscular, traditional view of how the government would help avoid a depression,’ says Austan Goolsbee, a member of the Obama Council of Economic Advisers at the time, who has been advising the Biden campaign. ‘If it were up to him, there would have been lots more infrastructure.’”

From there, what we will most likely see is the Fed ultimately fund a large percentage of the deficit (although Powell would never admit as much) – in order to suppress yields on Treasury bonds (a theme I’ve been arguing for several months) 

Whilst beyond the scope of this missive – I’m genuinely worried about the fiscal (and monetary) direction the US is taking.

I say that because I think the long-term repercussions could be extreme. 

But as I say – that’s a subject for another day. 

My focus is to simply play the hand we are dealt.

That’s all you can do. 

And for me – I see gold as a good ‘risk/reward’ bet at the current level – as governments and central banks globally find their “inner Keynesian spirit” to try and reboot deeply wounded economies.

Again, I could be wrong. 

Regards,
Adrian Tout