From a technical, fundamental and seasonal perspective, the current gold-price correction is exactly what the doctor ordered.
Note the position of the Stochastics oscillator at the bottom of the chart. It’s nearing oversold territory as the price meanders down toward key support that begins near $1225.
The decline is not violent. It’s orderly and calm. I would call the price action idyllic.
The SPDR fund (GLD)-NYSE) tonnage rose again yesterday to yet another multi-year high.
The price correction is being met with consistent institutional buying. I think that gold will transition into an accepted asset for mainstream money managers.
That will reduce volatility for investors and yield an atmosphere of confidence.
As gold declined toward the key $1228 - $1045 support zone in 2013, I noted that zone as a massive buying area.
Gold spent about two and a half years in that price area and then it charged up toward the first key resistance at $1307 - $1320.
From a purely technical perspective, a pullback toward the $1228 support zone is absolutely healthy and expected at this point in time.
The SPDR fund tonnage would not be rising, and the price action would not be as gentle as it is, if major institutions were sellers now. They are buyers and as the price drifts toward the $1228 area, I expect them to continue to buy and I expect the price action to continue to be calm and orderly.
Commerzbank (DE:CBKG) reports that ETF holdings rose 19 of the past 20 days and are up almost 90 tons since the start of May.
Essentially, the orderly gold price decline is being created by a combination of soft demand in India and strong Western buying.
Once the monsoon season arrives in India (in about a month), I expect the gold price to begin rising again as buyers there return to the market with size that is large enough to send shock waves throughout the Western gold community.
As robots replace human workers, governments are beginning to study the merits of a basic income for their citizens.
Many citizens are also clearly advocating the idea, and the idea is likely to involve a fair amount of money printing. That’s good news for gold.
It’s still early in the “basic income” game, but I’ve predicted that the failure of QE to stimulate inflation will bring government-orchestrated wage inflation and moderate gold revaluation.
I’ve also argued that traditional central bank policy can’t work with the current levels of government size and debt.
The influential Barron’s business newspaper suggests that the Indian government may be looking to load the country’s central bank with money printers. If that happens, I expect Indian citizen gold demand to essentially do a “moon shot”.
This is the GDX (NYSE:GDX) weekly chart. The price action during this gold stock correction is as orderly as the bullion correction, and that’s very positive.
A light pullback is in play from the $27 area resistance zone. The uptrend line has been penetrated, but there hasn’t been any violent price action on the downside.
It’s important to remember that the gold sector rally caught most analysts in the gold community by surprise. The buying has come from very strong hands. That means they will engage in only light profit booking rallies and buy aggressively on pullbacks.
For GDX, I’m predicting that enormous institutional buying will appear in the $20 area.
In the big picture, more governments are trying to turn their central banks into ATM machines. There are forecasts for bumper crops in India, due to a great monsoon season. Relentless institutional buying of gold stocks and bullion is in play. This price correction should be viewed as a spectacular buying opportunity.
Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
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