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No One Is Watching Gold, They Should

By Andy HechtCommoditiesApr 16, 2021 03:03PM ET
www.investing.com/analysis/no-one-is-watching-gold-they-should-200573458
No One Is Watching Gold, They Should
By Andy Hecht   |  Apr 16, 2021 03:03PM ET
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This article was written exclusively for Investing.com

  • Gold had an ugly first quarter
  • The price is sitting near a midpoint
  • Digesting gains in all currency terms
  • Consolidation is not bearish
  • Stimulus is bullish - Watch for central bank buying

In August 2020, when gold hit its all-time peak at $2063 per ounce, the yellow metal was the hottest asset in markets. Gold reached an all-time high in US dollar terms last August, but it had been breaking records in other currencies since 2019.

When gold reached its peak, Bitcoin was below the $12,700 level. Since then, gold corrected, and Bitcoin moved almost five times higher. At the $1744.80 level at the end of last week, gold was $318.20 or over 15.4% below its high from less than one year ago.

Gold fell with the US bond market. In early August 2020, the US 30-year Treasury bond futures were at 183-06. Last week, they were below the 157 level, over 14.5% lower. Gold and bonds have been moving in lockstep. Higher interest rates have weighed on the yellow metal as they increase the cost of carrying gold and provide an alternative to gold. Moreover, the ascent of Bitcoin and digital currencies have attracted capital away from the gold market.

The gold bull market began at the turn of this century at the $250 per ounce level. For over two decades, every dip in gold turned out to be a buying opportunity. The uglier the market looked, the better the result for the brave gold value-seekers. At the beginning of April 2021, gold remains out of favor, which could be the perfect reason to load up on the yellow metal that rallies when it looks the worst and corrects when it seems like it is about to go parabolic.

Gold had an ugly first quarter

The falling bond market pushed interest rates higher during the first quarter of 2021. The nearby US 30-year Treasury bond futures contract fell 10.53% despite the Fed’s quantitative easing purchases of $120 billion per month of debt securities. The bonds erased the 10.98% 2020 gain. Rising interest rates tend to be bearish for the gold market.

Meanwhile, the dollar index rose 3.72% in Q1 after falling 6.42% in 2020. Rising rates and an appreciating dollar caused gold to be the worst-performing precious metal over the first three months of 2021.

Gold Quarterly
Gold Quarterly

All charts courtesy of CQG

The quarterly chart highlights that gold ended a streak of nine consecutive quarterly gains in Q1 2021 as the yellow metal fell 9.57%. The total number of open long and short positions in the COMEX gold futures market declined from 560,059 at the end of 2020 to 457,315 contracts on Mar. 31, 2021, a drop of 102,744 contracts or 18.35%. Falling open interest when the price of a futures contract declines is not typically a technical validation of a bearish trend in a futures market. The nearly 10% decline in gold’s price caused many investors to exit risk positions on the market’s long side in Q1. Both gold and open interest have edged higher during the early days of Q2.

The price is sitting near a midpoint

Gold broke out to the upside in June 2019 when the price rose above the critical technical resistance level at the July 2016 $1377.50 peak. The July 2016 high became technical support. In August 2020, the price peaked at $2063, which is now the technical resistance level.

The midpoint of the move is at $1720.25 per ounce. At the end of last week, nearby June COMEX gold futures were sitting at the $1744.80 level, just above the midpoint of the crucial technical levels over the past nearly five years.

Digesting gains in all currency terms

In 2019 and 2020, gold reached record highs in almost all currency terms. The final shoe to drop was the dollar-based gold price last July when it moved over the 2011 $1920.70 high. 

Gold Quarterly
Gold Quarterly

The quarterly chart shows that gold in euro currency terms rose to a new peak in August 2019.   

Gold Quarterly
Gold Quarterly

The new record in British pound terms came in July 2019. 

Gold Quarterly
Gold Quarterly

In Japanese yen, the price moved to a new all-time high in July 2019.

Gold rose to record highs in virtually all currencies, including, but not limited to, Swiss francs, The A$ and C$, Chinese RMB, Russian rubles, and many others over the past two years. The yellow metal pulled back in all currency terms in Q1 2021. 

Consolidation is not bearish

Bull markets rarely move in straight lines. As a hybrid between a commodity and currency, gold volatility tends to be lower than most other raw material markets but higher than the currency arena.

After reaching an all-time peak last year, gold is digesting the move higher and consolidating around the midpoint of its breakout level and recent record high. Gold has made higher lows and higher highs for more than two decades. 

Gold Monthly
Gold Monthly

The monthly chart shows that maintaining the bullish long-term trend depends on remaining above the $1377.50 level. Gold’s current price action could take it to a far deeper correction, but the bullish trend remains firmly intact from a long-term technical perspective. Price momentum is falling on the monthly chart, but it is heading towards an oversold condition at the beginning of April. The relative strength indicator was sitting at a neutral reading.

Meanwhile, sentiment is critical for gold. Since the turn of this century, gold had found bottoms during corrections when the sentiment turned negative. It reached highs when the bullish frenzy peaked, as it did in August 2020 at over $2000 per ounce. Gold has taken a back seat to Bitcoin and cryptocurrencies in 2021, with bullish sentiment falling to the lowest level since 2018.

At the $1744.80 level, gold continues to consolidate and digest last year’s gains, and that is not bearish. 

Stimulus is bullish - Watch for central bank buying

Central banks had been high-profile buyers of the yellow metal over the past years, adding to reserves. Governments hold gold as an integral part of foreign exchange reserves, which validates the yellow metal’s role as a currency and a commodity. In 2018 and 2019, central banks bought the most gold since the 1960s. In 2020, the move to above $2000 caused many governments to refrain from purchases.  

With the price off the high in 2021, central banks are likely to return to the gold market. Poland plans 100 tons in purchases over the coming years. Russia had bought an average of 205 tons every year from 2014 through 2019. In 2020, the Russians only purchased 27 tons. China had also been a high-profile buyer of the yellow metal over the past years.

Meanwhile, it is challenging to gauge Russian and Chinese gold buying as both countries are substantial producers. Domestic output is likely building both government’s reserves. Since strategic reserves are state secrets, the full extent of Russian and Chinese activities in the gold market lack transparency.

Meanwhile, at the $1744.80 level, central banks are likely to return to the gold market in 2021. They are more likely to buy gold than Bitcoin as governments have a natural aversion to cryptocurrencies as they threaten control of the money supply.

The tidal wave of central bank liquidity and tsunami of government stimulus programs caused by the global pandemic is highly inflationary. The bond market is signaling rising inflationary pressures. The pandemic’s financial legacy will last for years, if not decades, as deficits are rising, and fiat currency values are declining. The US dollar index may have rallied by 3.72% in Q1, but it could be the healthiest horse in the glue factory that houses fiat currencies.

The correction in the yellow metal since last August could be a golden opportunity for investors. Gold has been a means of exchange for thousands of years, and its role in the global financial system is not changing any time soon. Buying gold when it looks worst has been the optimal approach for investing over the past two decades.

It is virtually impossible to pick bottoms in markets during corrections. A scale-down buying approach in the gold market could produce precious returns when the precious metal shines again in the coming months and years.

No one is watching gold closely these days, which could be the perfect reason to load up on the yellow metal.

No One Is Watching Gold, They Should
 

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No One Is Watching Gold, They Should

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Comments (13)
michael engel
michael engel Apr 17, 2021 5:39PM ET
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I sent u a Boston creme, two days ago, but it was "confiscated".
Jan Skilbrei
Jan Skilbrei Apr 17, 2021 11:33AM ET
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inflation, or yuilds, which is the most important factor for price of gold?
Hassan Salloum
Hassan Salloum Apr 16, 2021 1:08PM ET
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Is there any site that show how much central banks buy gold?
Mehdi Captain Music
Mehdi Captain Music Apr 16, 2021 1:08PM ET
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They don't buy gold in this situation.
Stefon Frazier
Stefon Frazier Apr 16, 2021 1:08PM ET
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Go to www.tradingster.com for the C.O.T. (Contracts of Troy) Report on Gold for free data. Swap Dealers and Managed Money are good to trade with!!!
Miguel Massens
Miguel Massens Apr 16, 2021 12:47PM ET
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I think it goes to 1400. but a pop to 1850 not out of question here
Tobias Schrøder
Tobias Schrøder Apr 16, 2021 12:47PM ET
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Haha sure, go bet on that. good luck bro
Edward Chong
Edward Chong Apr 16, 2021 12:47PM ET
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u will be surprise.
Samad Khan
Samad Khan Apr 16, 2021 12:45PM ET
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buyers
Mohammad Atif
Mohammad Atif Apr 16, 2021 12:45PM ET
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when gold market spike.. buying articles found on this site .. no one suggested buying when gold below 1700!! for holding.. we r in future market where we face contract expiration.. so better to not look long term its better to short term traders .. as this market ignors fundamental and manipulated by big giants .. like crude oil !!!
Rathindra Mukherjee
Rathindra Mukherjee Apr 16, 2021 12:45PM ET
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GLD was a buy at 155, got assigned few contracts and loved it. Overall Gold is in a bullish phase IMO.
Hariwidodo Marsudi
Hariwidodo Marsudi Apr 16, 2021 12:42PM ET
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Gold could reach 20.000 if there's no paper to trade, see there's a naked and brutal short sell each time market open, who did this??? yes Banks did it, they control the price as they want, its something they can't do on crypto.. that's the reason!
Cesar Medina
Cesar Medina Apr 16, 2021 12:42PM ET
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sells
Peter BullMarket
Peter BullMarket Apr 16, 2021 12:34PM ET
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Speak for yourself! I am warching gold for a long time
Andrey Glushchenko
Andrey Glushchenko Apr 16, 2021 11:49AM ET
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everybody watching
CHAD TENDIES
CHAD TENDIES Apr 16, 2021 9:25AM ET
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I went long on gold (NUGT calls and physical coins) when it hit the 1600s . Has been a solid gain so far.
Casino Crypt
CasinoCrypt Apr 16, 2021 9:02AM ET
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I would agree buying gold is more than essential ever since 1980 (Thatcher era) but the ability of economies to print money and inflate grey assets is very crude and sophisticated. Worthless assets are simply removed and new money restored.  Its a ponzi era and ponzis work amazingly efficiently  when the controller has access to cash printing presses.  So gold should be all that we buy but the experiment  is on going.
Alan West
Alan West Apr 16, 2021 9:02AM ET
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when interest rates rise money will be being destroyed. Printing doesnt go on forever.
Matthew Lyons
Matthew Lyons Apr 16, 2021 8:18AM ET
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Why would I invest in anything other than THETA?
Tobias Schrøder
Tobias Schrøder Apr 16, 2021 8:18AM ET
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what on earth is THETA? a gold ETF?
Ric Hoop
Ric Hoop Apr 16, 2021 8:18AM ET
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Tobias Schrøder nobody tell him
 
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