Since the middle of December, gold has executed an impressive advance. It rose from $1047 to an inter-day high of $1263. Money is again flowing into the yellow metal in response to a confluence of positive technical indicators, continued deterioration in other markets, as well as for geopolitical concerns. This has triggered a response from an increasing number of commentators who are calling this the beginning of a new gold Bull Market. Am I overly cautious in expressing a wait and see attitude, and will I miss the boat? Or, are those who are plunging into the market and driving it ever higher setting the stage for a later damaging decline? This can take gold to a final Bear Market low, and replace their current paper profits with real losses.
The gold Bear Market began in the summer of 2011 at a $1920 peak. The next 4 years witnessed the eternal metal's nearly 50% grueling decline to its December 17, 2015 low. Gold stocks simultaneously experienced an unprecedented price collapse. The major golds as measured by the HUI fell from a 638.59 top to a 99.19 low, for an 85% decline, while junior exploration companies fared far worse.
Numerous conditions and factors exist that can support the belief that gold may have bottomed in price. They may be sufficient to produce an impressive price rise from gold's low point. However, without confirmation I believe they are insufficient to justify even a suggestion at this point, that a major low is in place.
The markets well know the various economic, financial and geopolitical triggers that can kindle a rocket-like rise in gold. The enormous expansion of the Fed's balance sheet along with monetary easing by Japan, the EU and other major countries carry inflationary fears that may one day become real. Many large global banks remain de facto insolvent and might still collapse, setting off another financial calamity. The travails of Deutsche Bank are currently a visible example of this. The war against the Islamic State which has taken over large swaths of Iraq and Syria, or the civil war in Syria might escalate. The U.S., EU, Turkey and Saudi Arabia want al Assad of Syria deposed, while Russia and Iran want him to remain in power. Both the U.S. and Russia fly numerous daily sorties in the same regions. There can be a miscalculation or an accident, such as recently occurred when Turkey shot down a Russian jet, while following their different agendas. Either can engender a global confrontation. Similarly, the war in Ukraine is still simmering. It might expand and draw in the U.S. against Russia. Further, I believe the United States and other major economies are in recessions. Their stock and commodity markets are suffering, and their declines may suddenly steepen. Any of these can generate serious, wide-spread losses and bankruptcies and lead to international financial turmoil. Still other issues exist and combined, give the markets and investors constant reasons for concern if not fear.
Technically, gold has set up for a counter-trend rally. The precious metal posted a double bottom separated by a few weeks on December 17, 2015. This became part of a rounded bottom formation from which gold recently rose. Both of these indicators mark points from which great Bull Markets can arise. Also, the HUI drew a multiple bottom at about 100, culminating at 99.18 on January 18. This too was convincing and showed significant support. Further, the relative strength index (RSI) recently struck and rose from a very oversold low near 20 on the daily chart. Additionally, the U.S. dollar is sharply declining in tandem with gold's powerful rise, and is giving it added tailwind.
Of great significance, the U.S. dollar index completed a large, nearly perfect island reversal pattern. These are very powerful, and might indicate the top of its great Bull Market that began in 2001, with lower prices to follow for a considerable period.
A Bottom Is In, But Is It The Final Bear Market Low?
I believe the simultaneous appearance of these major and impressive technical factors alone are sufficient to mark an important gold low. If you combine these with the above daunting, pervasive, financial, economic and geopolitical concerns, I can see how a long-term bullish case for gold can be easily made. However, if you look deeper below the surface, I think the determination of the gold low is not as solid as one might think.
Brief double or small rounded bottoms are often responsible for generating important counter trend movements, but are not necessarily confirmatory of major lows. Gold's Bear Market is over 4 years old. The rounded bottom was only three months in duration, with the double bottom covering only a few weeks in extent. For comparison, gold's 2001-2011 Bull Market rose from a $255/$252.50 double bottom that spanned two years, from 1999 to 2001. Given these conditions, I have to question if they are sufficient to engender a final Bear Market nadir. I would like to see at least six to nine-month formations for each. Also, round numbers such as 100 for the HUI often provide important, temporary support. They may produce good rallies before the market finally reverses course, and the Bear Market resumes its downward journey. However, they don't positively confirm Bear Market end points. Regarding the RSI, it sharply rose along with gold and already touched the overbought zone on the short-term chart. It is true that markets can remain overbought or oversold for extended periods. However, at its recent 86 reading on the short-term chart it is preparing to signal caution.
I cannot understate the importance of the dollar's recent price action. And this is a major plus for the bulls. On February 2, when the dollar completed its island reversal top and fell, gold simultaneously exploded upward out of its rounded bottom. The dollar should continue to decline, and could act to buoy gold's current advance and support any short-term declines. Ultimately, I believe the fact that these important signs occurred simultaneously, is the match that touched off the yellow metal's explosive rise.
I would be remiss if I failed to note that gold marked its low the day after Janet Yellen announced the first federal funds interest rate hike in many years. This may be a coincidence, but market players could have interpreted this as the Fed's believing that the economy was expanding, and stirred their inflationary expectations. After all, given what appears to be Bear Markets in stock and commodities, the hedge funds and momentum players needed some market to play. With gold rising, and then silver and the gold stocks, these became some of the few "games in town" they could pile into and possibly generate profits. I'm certain that many hedge funds and momentum players have had a hand in this advance. Further, I think a short squeeze developed which may extend and take gold far higher in the near term.
What must not be forgotten is that "Bear Market rallies often look better than the real thing". They can appear from seemingly nowhere and sharply rise while the trapped bears rush for the exits to cover their short positions. Goldman Sachs yesterday repeated its recent bearish call on gold. I wonder if they're one of the trapped.
Why I'm Not Convinced Gold's Bear Market Has Ended
The primary reason for my reluctance to believe gold's Bear Market has ended, is the unwavering bullishness of so many gold enthusiasts, and the fact that too many seers were so quick to call the death of the bear. From its 2011 top, there have continued to be too many commentators repeatedly calling "bottoms" in gold. This perennial bullishness has kept numerous people from selling their positions.
The end of all earlier major gold Bear Markets have been attended by quite different circumstances! After suffering the anguish, misery, despair and substantial losses from a Bear Market, the vast majority that continued to hold their positions finally gave in. They sold their remaining metal or stocks and many were quoted saying the likes of, "I never want to see or hear about gold again" or, "gold is going lower and will never rise". Nearly to the man or woman the gold market was ensconced in a cloud of agony, depression and even disgust. I have yet to see this condition prevail since the bear took hold. Time and again these commentators have announced with authority that the Bear Market ended. At some point they must be right because all Bear Markets end. This could be the one. But to be prudent, I want the market to show me.
The simultaneous and compelling nature of the technical bottom indicators I discussed, lead me to believe that this rally still has "legs", and will likely move higher for at least the near term. This can be extended further in both time and price if the dollar continues to decline, and the brewing banking problems escalate. For the nimble, this presents an opportunity for short-term profits. However, if you make purchases be careful. Rallies such as these tend to end as quickly as they began. What is left are latecomer longs who are trapped.
For me to consider becoming long-term bullish I want to see how gold and the major gold stocks react during their first important correction. There will be one, as there always is. At that time, I will reevaluate my belief and act accordingly. However, until proven differently, I am approaching this as a Bear Market rally, but with an open mind.
As I write this, we may currently be in the midst of the defining correction I am looking for. For this reason, I am anxiously awaiting its outcome. This will help clarify for me whether we are in new Bull Market, or a bull trap.