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What’s Wrong With Gold?

By Andy HechtCommoditiesMar 01, 2021 08:09AM ET
www.investing.com/analysis/whats-wrong-with-gold-200564071
What’s Wrong With Gold?
By Andy Hecht   |  Mar 01, 2021 08:09AM ET
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This article was written exclusively for Investing.com

  • Commodities rising to new highs daily
  • Gold lagging other precious metals
  • Gold is resting, consolidating, and preparing for its next move to the upside
  • Three reasons why a rally is on the horizon
  • Use weakness as a buying opportunity; GDXJ could turbocharge the next rally

Gold holds a special and unique place in the world financial system. The yellow metal is a commodity with industrial applications. It is also a currency. Central banks, monetary authorities, and governments hold the precious metal as an integral part of foreign currency reserves.

Long before there were dollars, euros, pounds, yen, yuan, or any other currencies circulating through the worldwide financial system, gold was money. Gold has a prominent place in the Bible’s old testament. Archeological evidence points to gold’s role in ancient economies.

Every ounce of gold that has come from the earth’s crust continues to exist in some form. Gold is eternal. In 2020, the price rose to a modern-day high of $2063 per ounce. At the turn of this century, gold traded below the $300 level. With gold sitting below the $1740 level at the end of last week, some market participants say that gold’s best days are in the past.

However, you should not count out this precious metal which has a long history as a store of value. Gold is resting, and it is likely to surprise over the coming months and years. The two-decade trend in the gold futures market is higher. The current environment continues to support higher lows and higher highs.

Gold mining shares tend to provide leverage to the price action in the gold market. They underperform the metal when its price falls and outperform during periods when the commodity appreciates. Junior gold mining stocks tend to offer even more gearing than the more established producers as they explore for the metal. The VanEck Vectors Junior Gold Miners ETF (NYSE:GDXJ) holds a diversified portfolio of junior gold mining stocks.

Commodities rising to new highs daily

Over the past weeks and months, raw material prices have been rising to multi-year, and in some cases, all-time highs. Last week, copper rose to over $4.37 per pound, the highest level for the red metal since 2011 and only around 6% below its all-time high at $4.6495.

Lumber traded to a record high of over $1030 per 1,000 board feet on Feb. 23. Grain and oilseed futures recently rose to over six-year highs. Cotton moved to its highest price since June 2018 and sugar futures since March 2017.

In February, platinum broke out above its technical resistance level at the August 2016, $1199.50 high, reaching a peak at $1348.20 on Feb. 16, the highest price for the precious metal since September 2014, before correcting. Crude oil was above $61 per barrel at the end of last week and on its way to a potential test of the 2020, $65.65 per barrel high on the nearby NYMEX futures contract.

The commodities asset class continues to exhibit all the hallmarks of a bullish secular trend as we head into March 2021.

Gold lagging other precious metals

Gold was one of the first markets to reach a new record high in 2020.

Gold Weekly
Gold Weekly

Source: CQG

As the weekly chart highlights, gold hit a high of $2063 per ounce in early August 2020. Since then, gold has made lower highs and lower lows.

Open interest, the total number of open long and short positions in the COMEX gold futures market declined from over 550,000 contracts when gold was at its peak to 478,088 contracts at the end of last week. The over 13% decline in the metric as the price corrects is not typically a technical validation of an emerging bearish trend in a futures market.

Meanwhile, price momentum and relative strength indicators have declined from overbought conditions in August to oversold readings at the end of February. Weekly historical volatitity dropped from over 17.5% in August to just above 11% as of Feb. 26.

Gold is resting, consolidating, and preparing for its next move to the upside

Nearby April COMEX gold futures settled at the $1728.80 level at the end of February, 16.2% below the August 2020 record peak. From a long-term perspective, gold broke out above its critical technical resistance level at the July 2016, $1377.50 high in mid-2019 and continued to move higher until last August.

The midpoint of the breakpoint and all-time high stands at $1720.25 per ounce, just a few bucks below the Feb. 26 closing level. The low since last August occurred last week at $1714.90, as the precious metal closed the second month of 2021 at its lowest level since June 2020.

Gold is a unique asset. It has roles as a commodity and a currency.

Commodities often experience high volatility levels while currencies are just the opposite. However, like commodities, gold is ultimately sensitive to rising inflationary pressures. I view the current price weakness and consolidation in the gold market as constructive, as the precious metal digests last summer’s record high. I have been trading gold over the past four decades and have found when the market becomes overly bullish it often signals a correction. Rising bearish sentiment often precedes a bottom.

The spectacular rise in Bitcoin and other digital currencies has caused many market participants to flock to those assets. More than a few analysts cite Bitcoin’s utility compared to gold and suggest that the cryptocurrency will replace the yellow metal.

However, the parabolic price action could be just the factor that ignites the next rally in the gold market. When gravity hits the cryptos, the flight back to gold could push the precious metal to new record highs.

Three reasons why a rally is on the horizon

Gold has a long history as an inflation barometer. Central bank liquidity and government stimulus programs have dramatically increased the money supply and deficits over the past year. While the 2008 global financial crisis and the 2020 worldwide pandemic were very different events, monetary and fiscal policy responses were similar.

The only difference is that in 2020, the level of liquidity and stimulus was far higher. From June through September 2008, the US Treasury borrowed a record $530 billion to fund the stimulus. In May 2020, it borrowed $3 trillion. The US deficit is fast approaching the $28 trillion level. The next stimulus program is likely to push it over $30 trillion. The price tag for policies that encourage borrowing and spending and inhibit saving is inflation.

From 2008 through 2011, commodity prices soared because of the policies unleashed during the financial crisis. The flow of liquidity and stimulus is far greater today than it was a dozen years ago. Why should we expect any different reaction from markets?

In 2008, gold fell to a low of $681 during the risk-off period. By 2011, the yellow metal reached $1920.70, a rise of 182%. The March 2020 risk-off low for gold was at $1450.90. The same percentage move from 2008 through 2011 would take gold to a high of $2640 per ounce.

However, the stimulus level is far higher, so a $3000 target or higher seems likely. The first reason gold will eventually break to new and higher highs is that central banks and governments have planted very bullish inflationary seeds.

The second reason why gold is heading higher along with inflation is that the bond market tells us the US Fed is wrong about inflation. The Fed continues to report that inflation is running below its 2% average target rate. However, despite purchasing $120 billion each month in debt securities, the bond market has been falling for months.

UST 30-Y Weekly
UST 30-Y Weekly

Source: CQG

The weekly chart shows the 30-year US Treasury bond fell below technical support at the March 2020 169-09 low and was trading at 161-25 on Feb. 26. The next level of support stands at the late 2019 pre-pandemic 155-05 low.

Last week, the low was below the 158 level before the bonds recovered. The Fed controls short-term rates, but the market is the boss when it comes to interest rates further out along the yield curve. Imagine how low the long bond would be if the Fed were not buying $120 billion in debt securities each month.

Falling bonds and rising long-term rates are an ominous sign of inflationary pressures. Rising interest rates increase the cost of carrying gold and other commodities. However, when rates move higher because of inflation, it is a different story.

Finally, the dollar is the world’s reserve currency and pricing mechanism for most commodities. Gold is no exception. A falling dollar tends to be highly supportive of gains in the yellow metal. Rising long-term interest rates should support the dollar, but it is sitting near the lowest level since February 2018 against other world reserve currencies.

DXY Weekly
DXY Weekly

Source: CQG

The chart of the US Dollar Index, which measures the greenback against the euro, pound, yen, and other reserve currencies, shows that it declined from 103.96 in March 2020 to just below the 91 level at the end of February. Critical technical support stands at the February 2018, 88.15 low. A weak dollar tends to be bullish for commodity prices, including gold.

Use weakness as a buying opportunity; GDXJ could turbocharge the next rally

Gold is resting, but it is bound to awaken from its hibernation and consolidation period sooner rather than later. I expect gold to rise to a new record high before the end of 2021 as inflationary pressures continue to increase.

Mining shares tend to outperform gold on the upside on a percentage basis and underperform during downside corrections. Junior mining shares tend to provide even more leveraged exposure to gold as they produce and explore for the yellow metal.

Choosing individual mining shares can be a challenge as companies carry idiosyncratic risks due to management and specific mining properties. I prefer a portfolio approach to the sector when looking to turbocharge my gold exposure during price corrections.

The top holding and fund summary of the VanEck Vectors Junior Gold Miners ETF product include:

GDXJ Top Holdings
GDXJ Top Holdings

Source: Yahoo Finance

GDXJ has net assets of $5.77 billion and trades an average of over 7.4 million shares each day, making it a highly liquid product. The ETF product charges a 0.54% expense ratio.

In 2020, gold rose from $1450.90 to $2063 or 42.2%.

GDXJ Daily
GDXJ Daily

Source: Barchart

Over the same period, GDXJ rose from $19.52 to $65.95 per share, delivering a 237.8% gain. GDXJ did over five times better than gold on a percentage basis from the 2020 low to the high.

There is nothing wrong with gold; it is resting. Now is the time to look at products like GDXJ that will turbocharge the next move higher on a percentage basis.

What’s Wrong With Gold?
 

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What’s Wrong With Gold?

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Comments (26)
Freda Aejuna
Freda Aejuna Mar 04, 2021 4:39AM ET
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gold actually we add in the system on trading in the level of level system, actually target for gold on year 2020 p/gem@grm Rm500,u can counting From current index every country for exchange 💱= money
Felicity Chevalier
Felicity Chevalier Mar 03, 2021 11:33PM ET
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gold has some utility in IT but nothing that can't be replaced by other materials, and ultimately will be made obsolete by wireless technology, that cost increase not being worth the slight conducting improvement, and fiber. Mostly the wireless tech will go places fast once we get over this 5g thing and pick a better frequency.    Silver has the same problem. It's not as special as people want. It is probably easily replaceable by any number of other rare earth metals, and precisely why not letting china control all those resources is far more important than beating them to mars.
Felicity Chevalier
Felicity Chevalier Mar 03, 2021 11:33PM ET
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this website hates line breaks. anyway buy bitcoin
Art Fire
Art Fire Mar 03, 2021 12:38AM ET
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well, it's basically a color. As far as metals it's nowhere as useful as most others on the planet. And as far as people wanting it, they spend way more on other items.
Mark Pedzinski
Mark Pedzinski Mar 02, 2021 3:41AM ET
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gold isn't exchangeable! crypto, and currency is! long live crypto, international easily exchanged
Mehmet Dutlu
Mehmet Dutlu Mar 01, 2021 4:27PM ET
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With yields and USD rising, gold may fall further before it starts its rally. Other precious metals should actually follow gold, first correct then rally.
Mehdi Captain Music
Mehdi Captain Music Mar 01, 2021 3:47PM ET
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Nothing wrong, it’s doing the correction. It may touch $1600 or even lower around $1400.Fibonacci shows that.
Mehdi Captain Music
Mehdi Captain Music Mar 01, 2021 3:47PM ET
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For those who gave dislike 👎, please write your comments. We can share our opinions 👍.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Mar 01, 2021 3:45PM ET
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Nothing wrong with gold, it’ll eventually prevail. Those who consider bubbles as assets are the ones full of wrong. The system won’t be able to ptint like there’s no tomorrow, as the government understands that this money can make better choices for real lives, than to be pumped to make some virtual values in a dead economy, everything will change :)
Phil Kimmel
Phil Kimmel Mar 01, 2021 3:04PM ET
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Bitcoin is the new gold. He who snoozes, loses!
Husain Dana
Husain Dana Mar 01, 2021 2:30PM ET
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World is changing. Gold was the safe heaven when there was no other choice. Now after the invention of all these Altoins, gold will lose its shine for Altoins. Change is always difficult for some to accept.
Alberello Mac
Alberello Mac Mar 01, 2021 12:50PM ET
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I sold to buy more Tesla and Baba. 🤷🏻‍♂️
Shenell Whitely
Shenell Whitely Mar 01, 2021 12:47PM ET
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Support for me lies around $1683. I think that’s where it will take off from
Juan Arosemena
Juan Arosemena Mar 01, 2021 12:40PM ET
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Great article, USD supply will expand and it will be bullish for the real money, gold.
Eugenio Gallegos Devéze
Eugenio Gallegos Devéze Mar 01, 2021 12:38PM ET
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check $GDX inverse H&S If break down 30.98 I'll go with $DUST
Cosmic Dust
Cosmic Dust Mar 01, 2021 12:38PM ET
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Sooner or later central banks will have to do something about bitcoin. If they don't bitcoin has the real potential to go above $200k, or even $1million.
mike hudson
mike hudson Mar 01, 2021 12:34PM ET
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Well first there’s a over spot fee, after that you’ve got a credit card fee, when ya done there you’ve got a shipping fee, after the shipping fee you’ll have a make sure it has been hollowed out and fill with tungsten fee, After the it checks out tungsten free, you’ve got a storage fee, when it gets time to sell it, you’ve got an under spot fee, ***the normal buyer is probably paying 9k an ounce by the time he’s done. Oddly enough you dudes love bashing crypto currencies... but every last one of ya accept it as a payment method. Seems cheaper and easier to just buy crypto.
mike hudson
mike hudson Mar 01, 2021 12:34PM ET
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SquadW Name you are the victim of a pyramid scheme so entrenched in the scam you are literally chasing everyone who casually mentions cyrpto currencies with toxic insinuations about their intelligence like a dog chasing cars. Championing the education on the subject with little more than notions pulled from a Fortune cookie.
mike hudson
mike hudson Mar 01, 2021 12:34PM ET
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SquadW Name the questions posed in this comment are so far beyond your parroted doomsday pyramid scheme slogans its not even funny.
matt ce
matt ce Mar 01, 2021 12:34PM ET
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SquadW Name   but that's exactly the point. For many their investment philosophy has changed. Speculation trumps intrinsic value for now. It will revert back one day and it'll be ugly
Cosmic Dust
Cosmic Dust Mar 01, 2021 12:30PM ET
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I tend to believe gold is always manipulated for controlling inflation expectations. It is also manipulated to make US dollar look better. Of course bitcoin did not help. I hope I am wrong but I cannot find other explanation.
Sol Wein
Sol Wein Mar 01, 2021 12:29PM ET
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Yessssss! Bring it on baby!!!
Mike Nallano
Mike Nallano Mar 01, 2021 12:26PM ET
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The higher the overall markets go....the lower gold will go....the more buyers will finally swtich sooner than later over to gold to protect their wins.....wealth preservation! Nobody expect all their holdings with wins of 1000 -10000% to hold that gains for a longterm. If i look BTC.....the smart was switch back over to gold at 60000! 10000% since 2015 was enough i guess.
Trevor Downes
Trevor Downes Mar 01, 2021 12:22PM ET
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Don’t worry look at the weekly chart Gold goes up the middle of March buy gold middle of March hold it till September all the old Timers know this Been this way for the last three years
Filippo Bulgarini d Elci
Filippo Bulgarini d Elci Mar 01, 2021 12:21PM ET
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What's wrong with Gold!? Where did u live during the last months?! Have u ever heard about Bitcoin and how the big institutions and funds are dropping Gold to buy btc?!
SquadW Name
SquadW Mar 01, 2021 12:21PM ET
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do you realize bitcoin can be banned and donked 90% in one day? you buy tulips, its worth nothing, flat 0 $
Filippo Bulgarini d Elci
Filippo Bulgarini d Elci Mar 01, 2021 12:21PM ET
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Lol!! Banned!? They cannot ban Bitcoin, not anymore... Did u realize who's buying Bitcoin recently??
Chart Harmonics
Chart Harmonics Mar 01, 2021 12:04PM ET
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Pne look at the 1M RSI shows you the real story. Weve got a lot more down to go. Thats why fundamental traders have been losing money hand over fist for months.
Jess Skubi
Jess Skubi Mar 01, 2021 12:04PM ET
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I'm seeing it going to the 1600s. Are you seeing lower?
Edward Chong
Edward Chong Mar 01, 2021 9:28AM ET
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yes u are right. when gold becomes overly bullish it often signals a correction. it was overly bullish during the pandemic and tons of new players are in.
Alan West
Alan West Mar 01, 2021 9:24AM ET
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Gold isnt a currency, its a metal. Bade metsls ste booming because theyre useful, gold isnt. Technically it’s bombing and going much lower.
Nate Johnson
Nate Johnson Mar 01, 2021 9:24AM ET
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Technically gold and silver are the only currencies recognized in the US constitution.
TOMAS PARKINGTON
TOMAS PARKINGTON Mar 01, 2021 9:21AM ET
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what's wrong with gold and "silver" very simple gold and silver are real money and the banks are criminally dumping paper contracts on to the market to suppress it. the fiat dollar is dying..
Paul Barron
Paul Barron Mar 01, 2021 9:10AM ET
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There ia a *****of a lot of correct information here. Another great topic? Compare a 30 year chart of silver and gold. Note gold is 8 months ahead of silver and whats to come for silver. The two charts will write the story. Lol. Can’t wait
 
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