Money Talks

December 4th 2020

Gold Bull Still in Infancy: Four Forces Supporting Gold

All the fundamentals point higher for gold, while the techies suggest we could well see a little more…

From its peaking at $2,067 in August, gold is down by $250.

In this correction, gold has already given back 15%, leading some to conclude that the gold market it finished.

After all, we have three promising vaccines near for approval. They will be rolled out over the next few weeks and months, and life will start getting back to normal.

Or will it?

We’re still in a major second wave.

Many places till date are setting record numbers of daily Covid-19 cases. Lockdowns are ramping up.

And the effects of Thanksgiving reunions, followed by Christmas gatherings, are likely to spice up restrictions further as cases soar even higher.

Businesses will feel even more strains, and unemployment could undergo its own second wave.

Here’s why gold’s bull remains in its infancy…

Four Gold Forces

Although the news of several effective vaccines is very encouraging, it'll take a while to supply, distribute and administer to billions of individuals.

We are at the best months, but more likely a year, before some semblance of normalcy in our daily lives. The effects of this pandemic will be far reaching on society and business for a long time.

That’s why, in my view, there are a minimum of four major forces which will support gold in both the near and medium/long terms that investors got to understand.

Gold force #1.

The pandemic’s damage is not over, and that will lead to more stimulus. If we think we’ve seen the end of money printing, think again. Airlines, tourism, restaurants, commercial landlords and little retailers, to call a couple of , are struggling. Many of us have borrowed heavily, and many others have already gone bankrupt. They will still face challenges for several more months. And calls for help will endure.

Gold force #2.

The U.S. dollar continues to weaken. After peaking at 103 in march, the U.S. Dollar Index has been falling steadily. At 92, the index is back to levels last seen over two and a half years ago. There’s little doubt that massive money printing, and therefore the prospects of plenty more from Biden, could still pressure the dollar, helping to support gold within the process.

Gold force #3.

Negative real interest rates are here, and they’re likely to stay well into the longer term.

This chart pretty much says it all. Gold’s price (red line) clearly shows that it’s negatively correlated with real interest rates (blue line). And with a Fed committed to (at least) zero rates until well into 2023, and inflation likely to rise from mega-stimulus programs, expect more of an equivalent trend this chart demonstrates.

Gold force #4.

Yellen, the dove, is back. Joe Biden’s pick for Treasury Secretary is none other than former Fed Chair Janet Yellen. Her tenure ran from February 2014 to February 2018, while Biden was vice president. During that point, the Fed’s record grew by over $500 billion. Today, that sounds like chump change. But even just a few years ago that was still big money. The point is Yellen are going to be responsible of the purse strings, while her former deputy, Jerome Powell, runs the Fed. For all of the intents and purposes, lines between the Treasury and Fed will start to blur.

Where’s Gold Headed Next?

Now that gold has broken below is 200-day moving average of $1,800, it's likely to succeed in for $1,750, and possibly $1,700 next. Both the RSI and MACD momentum indicators are trending lower, confirming this move.

According to the foremost recent Commitments of Traders (CoT) reports, “smart money” gold hedgers are still relatively bearish, net short almost 300,000 gold futures contracts.

This also suggests more downside is feasible before a reversal. And as for gold stocks, the Gold Miners Bullish Percent Index also portends a touch more downside action first.

The index typically generates its best buy signals once it dips below 30 then turns upwards. We’re closing in thereon kind of setup, but we’re almost there yet. So, as I see it, all the fundamentals point higher for gold, while the techies suggest we could well see a little more near-term weakness.

That just means immediately gold is on sale, and therefore the discounts may last a touch longer.